Georgia: Ex Post Assessment of Longer-Term Program Engagement—An Update
Author: International Monetary Fund
Publication Date:
21 Apr 2011
eISBN:
9781455249299
Language:
English
Keywords:
ISCR; CR; consultation informational annex; consultation; government; current account; foreign direct investment inflow; private sector; exchange rate flexibility; banking sector; economic growth; monetary policy effectiveness; Exchange rate flexibility; Financial sector; Capital inflows; International reserves; balance of payments
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The government of Georgia moved forcefully to counter the economic impact of the August 2008 conflict with Russia and global financial crisis. Monetary and prudential policy easing was, however, unable to prevent a sharp credit squeeze. The economy is recovering at a solid pace, with real GDP growth expected to exceed 6 percent in 2010. To reduce exposure to changes in external market conditions, the authorities could rely more on domestic financing. Macroeconomic policies were generally aligned with previous IMF recommendations.

Abstract

The government of Georgia moved forcefully to counter the economic impact of the August 2008 conflict with Russia and global financial crisis. Monetary and prudential policy easing was, however, unable to prevent a sharp credit squeeze. The economy is recovering at a solid pace, with real GDP growth expected to exceed 6 percent in 2010. To reduce exposure to changes in external market conditions, the authorities could rely more on domestic financing. Macroeconomic policies were generally aligned with previous IMF recommendations.

I. Introduction

1. This Ex Post Assessment (EPA) Update reviews Georgia’s performance under two Fund-supported programs between 2004 and 2010: the 2004–07 Poverty Reduction and Growth Facility (PRGF) (total access of SDR 206 million or 147.5 percent of quota) and the 2008 Stand-By Arrangement (SBA) (total access of SDR 747 million or 497 percent of quota), which will expire in June 2011.

2. The recommendations of the 2003 EPA provide the starting point for this update. The 2003 EPA (Country Report No. 04/26) noted that Georgia made some progress toward macroeconomic stabilization during 1996–2003. However, the overall results fell short of expectations, owing to the pervasiveness of corruption, political fragmentation, and low institutional capacity (Appendix I summarizes the 2003 EPA recommendations and their implementation status).

3. Since 2004, Georgia experienced radical political and economic changes. The new political leadership that came to power after the Rose Revolution of November 2003 implemented an ambitious reform agenda during 2004–07 that turned Georgia into a business-friendly market economy and led to strong economic growth. In 2008–09, the economy was hit hard first by the conflict with Russia in August 2008 and subsequently by the global crisis. The economic recovery started in late 2009 and accelerated in 2010.

4. This EPA Update is structured as follows. First, it reports on macroeconomic and structural developments since 2004. Second, it assesses the objectives, design, and performance under the IMF-supported programs. Finally, it analyzes challenges and risks ahead, draws broad policy recommendations, and suggests possible future Fund engagement.

II. Macroeconomic and Structural Developments Since 2004

A. Macroeconomic Developments: From Fast Growth to Recession

Georgia enjoyed impressive economic growth over 2004–07, driven mostly by large external private inflows. This strong growth came to a halt in August 2008, when the conflict with Russia and the global crisis pushed the economy into recession. The recovery started in late-2009.

uA03fig01

Economic growth was systematically underestimated.

(Real GDP growth rate, in percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: World Economic Outlook (WEO), and Fund staff estimates.

5. During 2004–07, the Georgian economy performed beyond expectations. Real GDP grew at an average rate of 9 percent, reaching a peak of 12.3 percent in 2007. Growth was generated mainly by large foreign capital inflows, in particular FDI, driven to a large extent by privatization. Significant homegrown structural reforms undertaken throughout the period facilitated the transition to a market-based economy and fostered capital inflows.

6. As growth accelerated, new macroeconomic challenges emerged in the period leading to the double shock:

  • Inflation picked up in early 2005, remaining just below 10 percent throughout the period.

  • While fiscal revenue performance was impressive and beyond expectations (the revenue-to-GDP ratio increased by more than 10 percentage points in four years) and expenditure arrears were eliminated, lingering difficulties to contain expenditures persisted, favoring a procyclical fiscal stance. Procyclicality continued in 2008, with the fiscal deficit partly financed by the issuance of a Eurobond to be repaid in 2013.

  • External imbalances built up as reflected by a widening current account deficit. The central bank accumulated foreign exchange reserves rapidly to contain real appreciation pressures on the lari stemming from large capital inflows. Despite the relatively stable nominal effective exchange rate, the real rate appreciated by about 30 percent over the period on account of relative high inflation.

  • Monetary and exchange rate policies were not very effective in fighting inflation and preventing the economy from overheating. The large accumulation of international reserves was only partially sterilized, and contributed to a significant expansion of monetary and credit aggregates, which was not contained by the increases in reserve requirements and the policy rate.

  • Vulnerabilities mounted in the financial sector as banks tapped external wholesale funding, and the exposure to currency-induced credit risk and real estate prices increased. Financial dollarization declined on the back of lari appreciation and strong demand for local currency driven by the effort to increase tax revenues (collected in lari), but it remained high. Capitalization, liquidity, and provisioning for most banks continued to be strong thanks to tight capital adequacy, provisioning, and liquidity requirements. Nevertheless, owing to the excessive credit expansion, two major banks were temporarily undercapitalized in 2006, and several banks experienced liquidity shortages in the first half of 2008.

uA03fig02

Inflation picked up in 2005, and remained just below 10 percent until the crisis hit.

(Year-on-year change, in percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig03

Fiscal policy was procyclical during 2006–07 and most of 2008.

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.Note: The structural balance removes the cyclical component of revenues and exogenous factors from the standard fiscal balance.
uA03fig04

While tax revenues systematically overperformed…

(Tax and social contributions in percent of GDP)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig05

…difficulties in containing spending persisted.

(Primary spending in percent of GDP)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig06

Large external private capital inflows financed the widening current account deficit during 2004–07.

(Rolling annual, in millions of USD)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig07

The real effective exchange rate appreciated significantly during 2004–07.

(Index, 2000 = 100)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Source: Fund staff estimates.
uA03fig08

Gross international reserves increased fivefold from 2004 to 2007.

(In millions of USD)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig09

Monetary aggregates grew rapidly during 2004–07.

(12-month growth rate, in percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig10

Credit and deposit dollarization ratios declined during 2004-07, but remained high.

(In percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Source: Georgian authorities.

7. The dual crisis in 2008–09 hit the economy hard. Pressures on the capital account stemming from the loss of investor confidence generated a large decline in international reserves and a substantial balance of payments financing gap. This gap, including banks’ high repayment obligations in early-2009, was closed by Fund support and substantial loans and grants from official creditors and donors.2 The decline in output—3.8 percent in 2009—was larger than initially anticipated but smaller than in other countries in the region. Average inflation fell below 2 percent in 2009 reflecting lower world commodity prices and depressed domestic demand. The current account deficit ballooned to 22.7 percent of GDP in 2008 (the largest in the region) as exports collapsed and imports declined less, but improved in the following year.

uA03fig11

The current account deficit, which peaked in 2008, has been the largest in the region until recently.

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.

8. Fiscal policy played a supportive role during the crisis. The fiscal deficit increased significantly in 2008, mostly due to higher current spending, and increased further in 2009—to 9.2 percent of GDP—owing to tax revenue shortfalls. Expenditures shifted from defense, which had increased sharply over the previous four years, to conflict-related reconstruction and social spending.

uA03fig12

The overall fiscal balance deteriorated markedly in response to the crises in 2008–09.

(In percent of GDP)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.
uA03fig13

Spending composition has shifted after 2008 toward reconstruction and social spending.

(In millions of Georgian Lari)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.

9. While exchange rate flexibility increased somewhat during the crisis, monetary policy continued to be quite ineffective in supporting the economy. Immediately after the conflict, facing large depreciation pressures, the National Bank of Georgia (NBG) pegged the lari to the U.S. dollar in an attempt to stabilize it. As pressures mounted and the reserve losses increased significantly, NBG allowed the exchange rate to depreciate substantially and has since moved gradually to a more flexible exchange rate regime (Box 1). However, when the lari came under pressure again in mid-2010, the NBG intervened aggressively. Regarding monetary policy, large policy rate cuts from mid-2008 to end-2009 had limited impact on the deposit and lending rates, while credit continued to contract. Limits on the loan-to-deposit ratios due to covenants with shareholders and factors that, as elsewhere, undermined the credit markets, such as elevated credit and funding risks and worsening bank balance sheets, exacerbated the inability of the monetary policy stimulus to ease credit conditions.

uA03fig14

The policy rate cuts during 2008-09 failed to affect the lari deposit and lending rates.

(In percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Source: Georgian authorities.
uA03fig15

After a sharp decline, credit to the private sector has been recovering since February 2010.

(Growth rate of real credit to the private sector at constant exchange rate, in percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.

Exchange Rate Flexibility: Some Progress, but the Extent of the Commitment Still to Be Fully Demonstrated

From 2005 to 2007, in an attempt to contain real exchange rate pressures stemming from large capital inflows, foreign exchange reserves increased rapidly. Tensions between the NBG’s objectives of maintaining the external purchasing power of the lari and ensuring price stability arose in 2006, as the central bank was resisting exchange rate pressures at a time when inflation pressures intensified (figure below). As a consequence, toward the end of 2007 the NBG allowed the lari to appreciate significantly, and in March 2008 it declared that price stability was the main monetary objective.

In response to large depreciation pressures in 2008, the authorities pegged the lari to the U.S. dollar. Immediately after the August 2008 conflict, the lari came under strong depreciation pressures owing to the confidence shock and the drying-up of foreign inflows. The NBG’s strategy at the time—supported by the Fund—was to peg it to the U.S. dollar in an attempt to stabilize it.

As pressures on the exchange rate mounted and the reserve losses increased significantly at end-2008, the NBG allowed the exchange rate to depreciate. In October 2008, depreciation pressures re-emerged and NBG lost about 20 percent of reserves over a three-week period in an attempt to contain them. Subsequently, the NBG abandoned the peg and the exchange rate depreciated by 16 percent in the first ten days of November. The NBG has since moved to a more flexible exchange rate regime, though more gradually than recommended by the Fund. In this context, a multiple-price foreign exchange auction system was adopted in March 2009 and direct intervention in the interbank market was phased out by end-May 2009. The auctions led to improved functioning of the foreign exchange market (also evidenced by a lower share of NBG’s transactions in the total foreign exchange market turnover (figure below)) and enhanced flexibility of the exchange rate. The frequency of the auctions was also reduced gradually from three a week to two and infrequent (ad-hoc) interventions later on.

However, while intervention was limited from mid-2009 to early 2010 when exchange pressures were subdued, the authorities intervened heavily in mid-2010 as pressures reemerged. The uncertainty surrounding the municipal elections in May 2010 and expansionary monetary and fiscal policy from the first half of 2010 led to a bout of lari depreciation pressures, which the authorities resisted with, consequently, a significant loss in reserves.

uA03fig16

As pressures on the exchange rate increased in mid-2010, heavy intervention resumed.

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: Georgian authorities, and Fund staff estimates.1 Calculated as the three-month moving weighted average of the monthly nominal rate of appreciation (vis-à-vis the U.S dollar) and the monthly change in foreign reserves (change in central bank’s net foreign assets to previous period’s reserve money).

10. The banking sector weathered the crises relatively well, albeit with regulatory easing and large liquidity injections. Systemic risks have abated, and lending has resumed since early-2010. Banks’ balance sheets are cushioned by ample levels of capital and provisioning, but the elevated NPLs and the large exposure to the currency-induced credit risk remain important vulnerabilities. Deposit and credit dollarization ratios, which shot up during the conflict, have been declining recently but continue to be high. The authorities are reinforcing prudential regulations by tightening prudential norms back toward precrisis levels.

11. As economic activity resumed, the authorities have started to tighten domestic policies in 2010. The recovery began in the last quarter of 2009 and accelerated in the first half of 2010. Output growth in 2010—estimated at 6.3 percent, in line with growth in the region—was broad-based, driven by private sector demand. Inflation surged to around 10 percent, owing to rising food prices. The current account deficit narrowed, but remains high at about 10 percent of GDP. Fiscal consolidation started in mid-2010 along with the recovery, with the adjustment consisting mostly of expenditure compression, though overall spending was higher than originally budgeted as revenue windfalls were allocated to higher spending in mid-year. Monetary policy tightening also started in June 2010 in response to initial lari depreciation and recent inflationary pressures. In the second half of 2010, facing lari appreciation pressures, the NBG purchased dollars to reverse the crisis-induced decline in international reserves.

uA03fig17

Growth in 2010 is estimated to be similar to that of peers.

(Real GDP growth rate, in percent)1

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: WEO, and Fund staff estimates.1Real non-oilGDP growth for Azerbaijan and Kazakhstan.
uA03fig18

Inflation picked up in mid–2010, driven by rising food prices

(Year-on-year change, in percent)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Source: Georgian authorities.

12. However, market confidence has not been fully restored, and FDI inflows are yet to rebound. The recovery of FDI inflows has been slower than initially anticipated. While the banking sector has been experiencing outflows reflecting mostly debt prepayments, inflows to nonfinancial corporates have been strong, mostly due to the July Eurobond issued by the Georgian Railways.

uA03fig19

FDI inflows have systematically underperformed.

(Net FDI in millions of US dollars)

Citation: IMF Staff Country Reports 2011, 087; 10.5089/9781455249299.002.A003

Sources: Georgian authorities, and Fund staff estimates.

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

During 2004–07, structural reforms paved the way for the modernization of the economy with a more efficient public sector and an economic and legal environment more conducive to entrepreneurship. Since 2008, as the need to increase policy efficacy and flexibility became more pressing amid the crisis, the reform agenda has mainly focused on enhancing the effectiveness of macroeconomic policies.

13. Until 2003 Georgia was perceived as a highly corrupt and inefficient country with a poor business environment. In 2003, Georgia scored 124 out of 133 in the Corruption Perception Index published by Transparency International. Public frustration eventually led to a political upheaval, the Rose Revolution.

14. As the new leadership came to power in 2004, it undertook forceful measures to fight corruption, increase public sector efficiency, improve governance, and create a business-friendly environment. The authorities implemented comprehensive reforms that have borne long-lasting fruits. They effectively fought corruption (Box 2), reformed the civil service, reducing drastically public employment, restored the financial and technical viability of the electricity sector, and simplified regulations to facilitate business activity. An ambitious privatization program was also launched in 2004 (Appendix II).

15. As a result, revenue collection increased beyond expectations. The 2003 EPA indicated that revenue to GDP had the potential to increase by 4 percentage points over the subsequent five years. Owing to the reorganization of the revenue administration and the streamlining of tax policy (Appendix II), the tax-to-GDP ratio increase was almost twice higher than expected. Georgia’s success is also striking among its peers.

Significant Progress Has Been Made in Fighting Corruption

  • Considerable progress has been made since 2004 in fighting corruption, as shown by the 2010 Transparency International survey that ranks Georgia 68 out of 178 countries in its Corruption Perception index.

  • According to the 2010 Global Corruption Barometer, 77 percent of Tbilisi’s residents feel that the Georgian government has been effective in fighting corruption, which is the highest percentage among the 86 countries surveyed.

  • The latest World Bank Enterprise Survey (2008) echoes this perception from the perspective of the business community perspective. Georgian firms face less corruption than firms in the region: the Incidence of Graft Index, which is an indicator of the importance of bribery in dealing with government officials, is below the European and Central Asian region’s average.

Georgia’s tax performance stands out amongst peers.

(In percent of GDP)

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Source: WEO.Note: Revenues include taxes and social contributions of the general government (as a percentage of GDP).

16. Progress in the monetary and financial areas was less even during 2004–07. Despite substantial advances in improving the quality of banking supervision through the adoption of new regulations and staff training, a number of important 2001 FSAP recommendations—mainly inadequate assessment and supervision of credit concentration and connected lending, and limited supervisory powers related to governance—were yet to be implemented at the end of the PRGF (some of these recommendations were, however, undertaken after 2007). Reforms to enhance the conduct of monetary policy consisted mainly of strengthening the independence of NBG, and increasing the effectiveness and transparency of monetary policy (Appendix II).

17. Since 2008, the structural reform agenda has mostly focused on enhancing the effectiveness and flexibility of macroeconomic policies. This change in priorities was partly a natural shift to “second-generation” reforms and partly dictated by the crisis-related need to restore macroeconomic stability and, in turn, investor confidence, and to strengthen the financial sector. In this regard, significant progress has been achieved in public expenditure management, banking supervision, and exchange rate and liquidity management (Appendix II).

18. Despite their aim to stimulate private sector growth, some tax policy initiatives were ill-timed, and recent proposals could reduce fiscal policy flexibility. Precrisis proposed tax cuts on income and dividends were implemented during the crisis, aggravating the 2009 tax shortfall. Also, in late 2009, the authorities proposed to put to referendum any increase in the rates or the base of existing taxes and prohibit the introduction of progressive taxes. This proposal (the Economic Freedom Act) would have introduced a great deal of rigidity in the budget and created risks for fiscal consolidation plans. Ultimately, following extensive discussions with the Fund and other donors, the authorities recognized the importance of preserving fiscal policy flexibility and thus limited the scope of the referendum to rate increases for selected taxes and introduced an escape clause to deal with adverse fiscal shocks. The triggers of the escape clause will be specified through separate legislation in 2011.

III. Assessment of Recent Fund Involvement

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

The objectives and design of the PRGF focused on reforms to remove the main impediments to effective economic policy and foster private sector activity. The authorities’ strong ownership of their reform agenda was key to the program’s success.

19. The objectives of the PRGF-supported program were in line with the main recommendations of the 2003 EPA. They consisted in tackling corruption and governance issues so as to secure sizable gains in tax collections, streamlining government operations, reforming the civil service, and creating a business-friendly environment.

20. Although overall the program design remained unchanged overtime, some targets were dropped or modified, reflecting progress toward program’s objectives and new macroeconomic challenges. Conditionality was very frontloaded and focused on measures that would help fiscal consolidation and the modernization of the public sector, and foster economic activity. In line with the 2003 EPA recommendations, conditionality was highly concentrated in the fiscal area, in particular on tax and customs collections, arrears clearance, and social and infrastructure spending increases. Other fiscal reforms were targeted toward the strengthening of budget execution, transparency, and monitoring. Performance criteria (PCs) were streamlined mostly in the context of the third review, since they were considered redundant given the new macroeconomic reality. As signs of overheating started to emerge, the indicative target on reserve money was converted to a PC to strengthen the monetary policy framework and better tackle inflation, and a new indicative target on net domestic assets was introduced. Georgia received extensive technical assistance from the Fund in the fiscal, monetary, financial, and statistical areas.

21. Overall, the program was successful—it helped boost economic growth, fight corruption, strengthen revenue performance, and foster significant improvements in governance and the business environment. All reviews were completed on time and nearly all program conditionality was met or exceeded, particularly on tax collections. Quantitative PCs were almost always met, in many cases by wide margins, while on the structural side various PCs and benchmarks were implemented, though often with delay. Key to the success of the program was the authorities’ strong ownership and determination.

22. However, in the later years, the program could have been more forceful in addressing risks associated with overheating and increasing banking sector vulnerabilities. As the economy transformed, the country started to experience massive capital inflows, which, in particular in the later years, were channeled by banks mainly as foreign currency lending to unhedged domestic customers. The central bank had limited capacity to manage capital inflows, and the existing prudential framework failed to contain banks’ exposure to excessive external borrowing. Risks of overheating and rising bank vulnerabilities were discussed only late in the program. More comprehensive action would have been warranted earlier on to address such vulnerabilities, in particular through a more prudent fiscal stance, more effective expenditure control, stronger focus on enhancing monetary policy effectiveness, and redirected conditionality towards strengthening banking prudential regulation.

While overall the program design remained unchanged overtime, it adapted to reflect progress and new macroeconomic challenges.

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Sources: Georgian authorities, and Fund staff estimates.

23. The lack of reliable monitoring indicators limits the ability to assess progress in reducing poverty. During 2004–07, household monetary incomes, in particular social transfers, increased in real terms. The minimum pension was raised to $35 per month in 2007, from $7 in 2003. In addition, non-income poverty indicators improved, including access to and quality of education and health care, and provision of public services. Since consumption aggregates are not comparable over time, it is not possible, however, to assess comprehensively developments in poverty reduction during the period. That being said, poverty remained entrenched in rural areas, which benefitted only marginally from rapid economic growth.

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

The SBA, approved right after the conflict-induced crisis, aimed at providing significant resources in order to replenish international reserves and help restore investor confidence. The program’s design focused on measures to increase the flexibility and the efficacy of macroeconomic policies and strengthen banking sector soundness. The SBA was effective in restoring confidence and macroeconomic stability in the aftermath of the dual crisis, but the program’s objectives toward an exit strategy are likely not to be fully met.

24. The SBA intended to mitigate the impact of the shock on the balance of payments and to restore investor confidence. After August 2008, a large financing gap emerged as new capital inflows came to a stop. The Fund-supported program was intended to provide the policy guidance to address the macroeconomic imbalances, to provide large (and quick) financing necessary to ensure the restoration of investor confidence, and to catalyze significant external support.

25. Although Georgia is a PRGT-eligible country, an SBA arrangement was deemed appropriate. The choice of facility was determined to a large extent by the amount of access needed, which could not have been granted under the PRGF, but also by the expectation of the short-term nature of the BOP needs (mainly created by a capital account crisis). In addition, the requirement of a Poverty Reduction Strategy (PRS) document for accessing concessional financing would have delayed Fund’s support.

26. The program’s design focused initially on measures to stabilize the macroeconomic situation and support domestic demand. The program envisaged quarterly reviews, and conditionality focused on accommodating a strong fiscal countercyclical response, protecting international reserves, and enhancing the banking sector’s ability to mitigate potential vulnerabilities (Appendix II). The success of the reforms and the authorities’ credibility on reform implementation built up since 2004 also provided a basis to limit structural conditionality.

27. Since mid-2009, with a view to help the authorities prepare for an exit strategy, the program’s focus rightly changed toward consolidation to help preserve investor confidence and restore access to international markets. In the context of the third review,3 the program was extended through mid-2011 and augmented (by about 180 percent of quota). The augmentation was intended to help contribute to a faster reserve accumulation and to fill a larger gap that had emerged due to lower capital inflows and the stronger-than-initially-planned fiscal stimulus. In the context of the augmentation and extension, the program was revised by rebalancing the fiscal strategy toward consolidation and by moving to more direct budget support. Throughout the program, collaboration with official creditors and donors, in particular with the World Bank and the European Bank for Reconstruction and Development (EBRD), has been close.

Program’s design aimed to increase flexibility/efficiency of domestic policies and strengthen banking sector soundness.

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Sources: Georgian authorities, and Fund staff estimates.

This performance criterion (PC) could not be monitored at the sixth review because data were not available. A waiver of applicability was granted. The PC was eventually met.

28. Performance under the program in 2008–10 was broadly satisfactory, but slippages have occurred in the fiscal and exchange rate areas. Fund’s endorsement of the authorities’ decision to peg the currency immediately after the conflict was justified by the expected temporary nature of the pressures and the need to shield the economy from exchange rate risks. From the onset, the strategy envisaged a quick return to a flexible exchange rate to preserve reserves, which the authorities resisted until the peg became unsustainable at a large reserve cost. Quantitative PCs were met in most reviews, with the exception of the NIR target for end-June 2010 that was missed because of foreign exchange market pressures due to municipal elections. PCs related to the fiscal deficit were also frequently modified to rightly allow automatic stabilizers to operate and to accommodate countercyclical increases in spending during the 2008–09 downturn. However, against previous Fund advice, the authorities issued in April 2010 a budget supplement allocating most of the additional revenues from higher growth to new spending. In this context, a new PC on government spending was introduced at the time of the sixth review to contain the recurrence of supplementary spending revisions. Structural benchmarks were in some instances implemented with delay. Georgia received extensive technical assistance (TA) from the Fund in the fiscal, monetary, financial, and statistical areas.

29. During the SBA, the government made efforts to support the poor by increasing social benefits. The World Bank estimates that during the crisis the poverty headcount may have increased from 23.7 percent in 2007 to 27.1 in 2009 (due to weaknesses in the poverty monitoring system, it continues to be difficult to provide a comprehensive assessment of poverty). To alleviate the crisis impact, the government expanded the targeted social assistance and medical insurance to the poor.

30. The SBA was effective in restoring confidence and macroeconomic stability in the aftermath of the dual crisis, but it remains to be seen whether the program objectives toward an exit strategy will be fully met. Macroeconomic stability has been regained thanks to the supportive domestic policies that were implemented under the program. As the recovery took ground, fiscal consolidation and monetary tightening also started. However, fiscal consolidation in 2010 could have been more ambitious, if the domestic capital budget had been contained and retrenched faster or additional more comprehensive tax measures had been adopted and revenue windfalls had been saved as recommended by staff, suggesting that the large budget financing by the Fund may have reduced incentives for faster adjustment. Monetary policy effectiveness remained weak, although some traction has been gained since April 2010, in the context of moving toward inflation targeting, as planned by the authorities. Also, exchange rate flexibility has improved, but the level of net international reserves (excluding Fund support) are yet to reach their precrisis levels, which was a main objective of the SBA. Finally, the program assumed a strong recovery of FDI inflows, which has not materialized as projected. Under the program, shortfalls in capital inflows were to be met by faster exchange rate adjustment, and indeed the exchange rate has depreciated during the program period. However, because the delayed response of FDI was viewed as temporary, reserves were used to counter exchange rate pressures in early 2009 and again in mid–2010 (Box 1). Additional exchange rate adjustment could have been desirable against the risk of permanently lower FDI.

IV. Challenges and Risks Ahead and Future Fund Engagement

A main challenge ahead is to prepare for facing the high debt obligations coming due in 2012–13. The main risk is a failure of FDI to rebound. Fiscal consolidation and increased exchange rate flexibility, combined with enhanced effectiveness of monetary policy, should be key components of the authorities’ policy strategy ahead. A successor arrangement with the Fund can help anchor confidence and guide the design and implementation of such a strategy.

31. The country is well positioned to refinance its large debt repayments due in 2012–13, but rollover risks cannot be ruled out. While solvency risks on the sovereign debt appear manageable, as reflected in the DSA, debt repayment obligations in 2012–13 are high. Georgia’s ongoing recovery and rating upgrades should facilitate rollover, but potential adverse spillovers from the instability in the Euro zone and Middle East and the sluggish rebound in investor confidence—as shown by the slow return of capital inflows—might impact the yields. Although the state-owned Georgian Railways successfully tapped the markets in July 2010, the yield on the issued Eurobond was considerably higher than similarly-rated sovereign Eurobonds.

32. The main risk to the macroeconomic outlook and, in turn, to the authorities’ policy strategy is protracted low capital inflows. In the absence of a strong rebound in capital inflows (which, despite subdued geopolitical risks, have not yet recovered to expected levels), the policy adjustment would have to be stronger than currently planned, requiring larger fiscal consolidation to preserve debt sustainability and exchange rate adjustment to its equilibrium level. There would also be a need to refocus the current growth strategy in order to promote more actively domestically-originated growth and export diversification including through the expansion of sectors with significant growth potential, such as tourism and transportation, where progress has been made, and agriculture, where little action has been taken so far. On the contrary, were capital flows to rebound massively, there would be a need to develop strategies to manage them, while avoiding overheating pressures through enhanced exchange rate flexibility and monetary policy efficiency, and if needed, by adopting regulatory measures to discourage short-term capital inflows (hot money).

33. In light of the elevated risks lying ahead, pursuing fiscal consolidation is crucial. A successful fiscal adjustment could be based on reduced spending, consistent with the authorities’ strategy. However, given the reduced room for further expenditure cuts, as well as inflation and electoral pressures, the credibility of the adjustment could be enhanced through the introduction of new tax measures. Therefore, preserving the ability to rapidly adopt revenue measures could be needed for a lasting consolidation. Increased budget flexibility would also help create the fiscal space to finance pro-growth and poverty-reduction spending.

34. Fiscal consolidation should be complemented by enhancing exchange rate flexibility and building up international reserves. Enhancing the exchange rate flexibility further by limiting foreign exchange intervention to smoothing extreme volatility would help protect the international reserve buffer, which, despite being recently on an upward trajectory, remains below its precrisis level and inadequate in light of high dollarization ratios. A higher reserve buffer would help ensure financial stability, mainly by enhancing NBG’s role as a lender of last resort in foreign exchange in case of liquidity shortages.

35. Preparing the ground for moving to inflation targeting can help monetary policy gain traction. It is crucial to continue to implement the prerequisites for inflation targeting, including by improving price statistics, investigating and developing the transmission mechanism from the policy rate to inflation, improving the modeling capacity for inflation forecasting, and introducing a strong accountability framework. During the transition phase, NBG should stand ready to complement changes in the policy rate with other instruments (e.g., changes in reserve requirements), when needed. Gradual sustainable de-dollarization, achieved by pursuing sound policies and local currency and capital market development will contribute to enhanced monetary policy effectiveness.

36. The resilience to shocks of the banking sector should be further enhanced. In this context, it would be important to tighten regulation back towards precrisis levels, expand the central bank’s supervisory capacity, and conduct regular stress tests. The merits of a deposit insurance scheme covering only lari-denominated term deposits should be re-considered. Risks stemming from elevated NPLs and large exposure to currency-induced credit risk are difficult to mitigate in the short run and need to be monitored carefully. An update of the 2001 FSAP in due course could help assess the health of the financial sector and remaining vulnerabilities.

37. A successor arrangement with the Fund can help guide the conduct of macroeconomic policies needed to fully regain market confidence consistent with the authorities’ exit strategy. The key objectives of the program would be to support macroeconomic stability in order to anchor investor confidence and strengthen access to international financial markets. In this context, the program would need to design and implement a sound macroeconomic framework (built on more conservative FDI inflows assumptions), strengthen capacity for monetary policy, address fiscal consolidation buttressed by an explicit expenditure cap in order to strengthen expenditure control, and promote exchange rate flexibility and a higher international reserve buffer.

38. The choice of Fund facility would depend on the existence of an actual or potential balance of payments need and could be in the form of a blended arrangement. Georgia is eligible for Fund concessional support. As such, the authorities should consider a blended arrangement that, while offering the same access options as a stand-alone SBA, would provide more favorable financial terms than the latter. Also, given the role that the arrangement would play in guiding macroeconomic policy and providing insurance in light of high rollover risks, a precautionary (in the absence of actual balance of payments gap) SBA/SCF arrangement would appear to fit best the needs of the country over the next two years. In this case, a PRS document would not be required. Given the receding external risks relative to the current SBA, program monitoring could occur at a semiannual frequency. However, if risks materialize, a longer-term engagement with the Fund cannot be ruled out. Under such a scenario, there would be a need for greater policy adjustment, which could be partly generated by additional structural reforms. Should this turn out to be the case, a blended ECF/EFF, which would have a longer duration and also more advantageous financing terms than an SBA/SCF, should be considered. In this case, a PRS document would not be a delaying factor as it would have been when the current SBA was negotiated, since such a document would need to be circulated to the IMF Board only by the time of the second review.

Table 1.

Georgia: Selected Macroeconomic Indicators, 2004–10

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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.

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

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Appendix II. Structural Reforms during 2004–10

1. During 2004–07 the authorities implemented a comprehensive reform agenda that helped address corruption, reduced government inefficiencies and fostered the business environment. In particular, reforms aimed at:

  • Improving governance in the public sector. Measures included: (i) routine auditing of SOEs was widened in 2004 to all SOEs with a turnover higher than $5 million; (ii) management of these enterprises was strengthened by appointing supervisory boards guided by performance-based contracts; (iii) all public tenders were announced on the website of the State Procurement Agency; (iv) an ambitious privatization program was implemented; and (v) a large number of budgetary organizations were transformed into legal entities of public law with higher operational and financial autonomy (in particular, 2700 schools in 2005).

  • Reforming the civil service. A new generation of policymakers was appointed to key government positions particularly vulnerable to corruption (including in the tax and customs departments of the ministry of finance and the ministry of interior). Public employment was reduced by 23 percent. The Police was modernized. State service became prestigious. The salary savings as well as some donor funds were used to increase the remuneration of the staff, reducing incentives to bribe-taking. Misconduct of state officials has been severely punished since then.

  • Streamlining the tax and customs codes. The government passed a comprehensive tax reform in 2005: (i) The number of taxes was reduced from 21 to 7; (ii) The bases of the VAT and profit tax were broadened by eliminating certain exemptions and special regimes; (iii) The personal income tax rates were replaced by a single flat rate of 12 percent and was later merged in 2008 with the payroll tax rate (the rate of which was further decreased in 2009). The VAT rate was reduced from 20 to 18 percent. In addition, efforts were made to simplify the customs code (2007) and to liberalize the trade regime, with a notable revision of tariffs in 2006 reducing the number of rates from 16 to 3 and the top rates from 30 to 12 percent.

  • curbing tax fraud and evasion. A number of high-profile officials from the former administration and major state-owned enterprises suspected of corruption and tax fraud were fired and prosecuted; the prosecution measures were blunt and publically broadcasted (2004). The tax and customs departments were reorganized (then merged in 2007) with greater focus on large taxpayers. An excise tax inspectorate was established to bolster excise receipts by eliminating fragmentation in the control of excisable goods that occurred when the customs and tax departments shared responsibilities in this area (2004). A financial police with investigation authority was created under the ministry of finance, replacing economic crime units in the power ministries (2004). The authorities announced a one-off amnesty on undeclared tax arrears to regularize the informal sector (2004). The government established a revenue service to increase tax collection efficacy, improve taxpayer services, and develop risk-based customs controls and tax audits (2007).

  • Removing obstacles to growth in transport infrastructure and energy supply. In the energy sector, reforms successfully restored the sector’s technical and financial viability and expanded capacity, through modernization, privatization and resource diversification Regulations to start and operate a business were streamlined. The World Bank Doing Business Survey ranks Georgia 12 (out of 183 countries) for the ease of doing business in 2011.

2. Advances were also made in monetary reforms during 2004-07. These reforms aimed at strengthening the independence of NBG, and enhancing the effectiveness and transparency of monetary policy. The main reforms in this area included (i) prohibiting direct lending to the government and initiating the phased conversion of the government debt to NBG into tradable securities; (ii) clarifying NBG profit transfer procedures; (iii) creating a decision-making body in the form of the monetary policy committee; (iv) overhauling the reserve requirement system, (v) improving the quality of and access to key statistics; and (vi) launching the publication of periodical reports.

3. Since 2008 the structural reform agenda has focused on improving the effectiveness of domestic policies and strengthening the financial sector.

4. Fiscal reforms. The pace of reforms to improve budget planning, auditing, and cash management has gathered momentum under the SBA, with important steps in the following areas:

  • Adoption of a new budget system law. The main PFM reform in 2009 was the adoption of a budget code, aimed at consolidating and simplifying budget legislation; unifying central and local budgets; and accelerating the budget approval and execution process. The budget code also introduced program budgeting.

  • Strengthening of the medium-term framework. Since its first publication in 2005, the Basic Data and Directions (BDD)—a document that presents annually fiscal and macroeconomic projections and sectoral strategies for the following four years—has been underused, partly because the previous budget system law did not properly articulate the BDD calendar with the budget preparation cycle. In this regard, the new budget code brings several improvements: the elaboration of the BDD is better integrated in the budget cycle and will now be submitted to the Parliament along with the annual budget; the ceilings are included in the BDD; the list of spending agencies involved in the BDD preparation is extended.

  • Treasury reforms. The authorities re-activated the T-bill market in 2009 and extended the term structure to two years in early 2010. Another important reform pertains to the design and implementation of an integrated PFM information system. The design of the IT system was finalized in 2009 and tenders were made in 2010. The new integrated PFM information system is now expected to be fully implemented in 2013–14. In addition, the Treasury is involved in accounting reforms to comply with the IPSAS norms by 2020 and to complete the transition to accrual GFS 2001.

  • Expansion of internal audit activities. Several PFM reviews pointed to the need to develop internal control and audit systems in the public sector. In 2008, a unit was created in the MOF. In 2009, the Parliament adopted a law on internal audit that regulates the scope, principles, methodology, requirements of internal audit within the public sector. This law will precede the creation of internal audit units in line ministries.

  • Improvement of taxpayer services, through a number of initiatives: development of e-filing systems; establishment of a dispute resolution office (2008); e-declaration service (2009); progress in the risk-based audit functions in the revenue service; adoption of a new tax code merging the existing customs and tax codes (2010); transformation of the revenue service into an independent entity with the aim of increasing efficiency and modernizing tax enforcement (2010); setting-up of customs clearance zones (2010).

5. Monetary and exchange rate reforms. Since 2008 NBG has significantly improved exchange rate and liquidity management, and started the transition to a soft inflation targeting regime. The main reforms have aimed at (i) strengthening the lender of last resort (LOLR) facility, (ii) increasing the exchange rate flexibility (mainly through the introduction of an auction-based system for the foreign exchange market, which replaced the daily fixing sessions in the inter-bank market), (iii) improving the liquidity framework to enhance liquidity forecasting, (iv) strengthening the transmission mechanism of policy rate changes through the re-activation of standing facilities and the introduction of guaranteed access to refinancing loans, (v) reforming the payment system, and (vi) improving the management of the international reserves. However, the creation of the Financial Supervision Agency as an independent legal entity in 2008 and its subsequent merger into the NBG has likely diverted attention from pressing banking-related issues and stretched scarce capacity.

6. Financial sector reforms. A series of measures were adopted to strengthen financial sector supervision: (i) enhanced monitoring of banks, notably by re-organizing the banking supervision department, and conducting regular stress tests; (ii) adoption of a contingent plan for dealing with crises scenarios and bank resolution, and (iii) expansion of central bank’s powers over banks under temporary administration granted through the amendment of the NBG’s organic law.

Annex I. The Authorities’ Reaction

Discussions of the Ex Post Assessment (EPA) update were held in Tbilisi on February 23–4, 2011. The authorities broadly shared the conclusions and recommendations of the report and thought that, in most aspects, the report adequately reflected developments in Georgia during the period under review. Their comments are summarized below.

  • The authorities viewed macroeconomic challenges in 2004–07—namely the widening of the current account deficit, and the increasing money and credit expansion—predominantly as effects of permanent upward shifts in the potential output and financial deepening rather than signs of overheating. They thought that monetary policy had played a crucial role in keeping inflation under control, and did not share the conclusion that monetary policy was not very effective during the PRGF period.

  • The authorities considered that increased vulnerabilities in the banking sector during the precrisis period were due mainly to the lack of a macro-prudential and forward-looking regulatory framework, which limited the supervisors’ ability to concentrate on the major sources of risk. Supervision was instead concentrated on micro-prudential risks, and the central bank resisted pressures to ease micro-prudential requirements, which remained conservative compared to peer countries. Moreover, the authorities did not share the view that concentration and connected lending were key areas in need of improvement, and believed that the focus should have been mainly on the aforementioned macro-prudential regulatory shortcomings.

  • The authorities also pointed out that, in line with a countercyclical policy conduct and the recommendations in the EPA update, regulation has been recently tightened back toward precrisis levels. In addition, to address the shortcomings of the existing regulatory framework, the authorities are moving gradually toward risk-based supervision, including by taking into account systemic risks, introducing macro-prudential oversight, and conducting a more forward-looking supervisory assessment.

  • The authorities indicated that, before the conflict and global crisis shocks, they were targeting fiscal balances, and that fiscal policy decisions were based on public debt considerations, which was on a downward trend in GDP terms over 2004-07. Also, they clarified that the 2008 Eurobond was not issued with the purpose of financing the fiscal budget, and that it was rather meant to establish Georgia’s benchmark in international capital markets. Subsequently, the authorities created two sovereign reserve funds, in which they safeguarded the Eurobond proceeds. In the context of the fiscal stimulus in response to the crisis, the authorities deemed appropriate the tax policy initiatives to stimulate the economy despite their permanent nature. In their view, the countercyclical benefits of these measures outweighed the challenges that they would present to achieve medium-term fiscal consolidation. Also, the authorities viewed fiscal consolidation in 2010 as appropriately ambitious, emphasizing that capital spending was, to a large extent, financed by donor’s highly concessional assistance. Regarding a possible successor IMF-supported program, the authorities noted that the recommendation of maintaining the expenditure cap is challenging in the context of rising food and fuel prices.

  • The authorities emphasized their commitment to exchange rate flexibility and indicated that the decision to peg the currency in the aftermath of the August 2008 shock and subsequent interventions were dictated by the need to maintain public confidence in the financial sector. They pointed out that the peg was abandoned about two weeks after it was introduced and flexibility was restored thereafter. However, when the second shock hit the economy at end-September, exchange rate flexibility was again limited. In early November 2008, as it became clear that the shock was not of a temporary nature, the authorities abandoned the peg and allowed the lari to depreciate. The authorities also observed that greater exchange rate flexibility before moving to the auction system in early 2009 would have not been feasible, given the preparation time needed to introduce the auction system. Furthermore, the authorities deemed that the exchange rate pressures in mid-2010 were transitory, therefore justifying their heavy interventions to contain exchange rate volatility. The latter is viewed by the authorities as detrimental to the economy, given the high private sector dollar indebtedness and risks of additional conversions of lari holdings into US dollars. Also, they noted that, by end-2010, interventions were less than envisaged under the SBA-supported program and net international reserves higher than the end-year target. In the authorities’ view, this over-performance was to a large extent attributable to their successful containment of exchange rate volatility.

  • The authorities also made the point that the recent exchange rate assessment, conducted after the period covered by the EPA, suggests that the real effective exchange rate is overvalued by less than 10 percent, compared to previous findings of a larger overvaluation. In their views, these new results suggest that no additional exchange rate adjustment was necessary during the SBA.

  • Regarding the Economic Freedom Act and the referendum requirements for new taxes and increases in the rates of existing taxes, the authorities pointed out that the requirements may be suspended through an escape clause, the conditions of which will be defined in a separate organic law. They stressed that this clause would maintain adequate tax policy flexibility to react quickly to possible adverse shocks.

  • The authorities indicated that they did not see the refinancing of the 2013 Eurobond as a challenge. They emphasized that the Georgian Eurobond’s secondary market performance is currently encouraging, and that they were confident that Georgia’s credit history would allow debt refinancing at favorable conditions. They also pointed out that FDI inflows were not the only source of growth, and that sectors such as tourism and energy were also important contributors.

1

The team is comprised of Stefania Fabrizio (head) and Linda Kaltani (both SPR), Alina Luca (MCD), and Luc Eyraud (FAD).

2

In 2008, donors pledged $4.5 billion of financial assistance over 2008–11.

3

The third review was postponed to allow for additional discussions on the implications of a deeper-than-expected economic correction and a revision of government spending plans for the year.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
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
Author: International Monetary Fund
Volume/Issue:
Volume 2011: Issue 087
Publisher:
International Monetary Fund
ISBN:
9781455249299
ISSN:
1934-7685
Pages:
73
DOI:
https://doi.org/10.5089/9781455249299.002
  • View in gallery

    Economic growth was systematically underestimated.

    (Real GDP growth rate, in percent)

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    Inflation picked up in 2005, and remained just below 10 percent until the crisis hit.

    (Year-on-year change, in percent)

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    Fiscal policy was procyclical during 2006–07 and most of 2008.

    (In percent of GDP)

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    While tax revenues systematically overperformed…

    (Tax and social contributions in percent of GDP)

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    …difficulties in containing spending persisted.

    (Primary spending in percent of GDP)

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    Large external private capital inflows financed the widening current account deficit during 2004–07.

    (Rolling annual, in millions of USD)

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    The real effective exchange rate appreciated significantly during 2004–07.

    (Index, 2000 = 100)

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    Gross international reserves increased fivefold from 2004 to 2007.

    (In millions of USD)

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    Monetary aggregates grew rapidly during 2004–07.

    (12-month growth rate, in percent)

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    Credit and deposit dollarization ratios declined during 2004-07, but remained high.

    (In percent)

  • View in gallery

    The current account deficit, which peaked in 2008, has been the largest in the region until recently.

    (In percent of GDP)

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    The overall fiscal balance deteriorated markedly in response to the crises in 2008–09.

    (In percent of GDP)

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    Spending composition has shifted after 2008 toward reconstruction and social spending.

    (In millions of Georgian Lari)

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    The policy rate cuts during 2008-09 failed to affect the lari deposit and lending rates.

    (In percent)

  • View in gallery

    After a sharp decline, credit to the private sector has been recovering since February 2010.

    (Growth rate of real credit to the private sector at constant exchange rate, in percent)

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    As pressures on the exchange rate increased in mid-2010, heavy intervention resumed.

  • View in gallery

    Growth in 2010 is estimated to be similar to that of peers.

    (Real GDP growth rate, in percent)1

  • View in gallery

    Inflation picked up in mid–2010, driven by rising food prices

    (Year-on-year change, in percent)

  • View in gallery

    FDI inflows have systematically underperformed.

    (Net FDI in millions of US dollars)

Economic growth was systematically underestimated.

(Real GDP growth rate, in percent)

Inflation picked up in 2005, and remained just below 10 percent until the crisis hit.

(Year-on-year change, in percent)

Fiscal policy was procyclical during 2006–07 and most of 2008.

(In percent of GDP)

While tax revenues systematically overperformed…

(Tax and social contributions in percent of GDP)

…difficulties in containing spending persisted.

(Primary spending in percent of GDP)

Large external private capital inflows financed the widening current account deficit during 2004–07.

(Rolling annual, in millions of USD)

The real effective exchange rate appreciated significantly during 2004–07.

(Index, 2000 = 100)

Gross international reserves increased fivefold from 2004 to 2007.

(In millions of USD)

Monetary aggregates grew rapidly during 2004–07.

(12-month growth rate, in percent)

Credit and deposit dollarization ratios declined during 2004-07, but remained high.

(In percent)

The current account deficit, which peaked in 2008, has been the largest in the region until recently.

(In percent of GDP)

The overall fiscal balance deteriorated markedly in response to the crises in 2008–09.

(In percent of GDP)

Spending composition has shifted after 2008 toward reconstruction and social spending.

(In millions of Georgian Lari)

The policy rate cuts during 2008-09 failed to affect the lari deposit and lending rates.

(In percent)

After a sharp decline, credit to the private sector has been recovering since February 2010.

(Growth rate of real credit to the private sector at constant exchange rate, in percent)

As pressures on the exchange rate increased in mid-2010, heavy intervention resumed.

Growth in 2010 is estimated to be similar to that of peers.

(Real GDP growth rate, in percent)1

Inflation picked up in mid–2010, driven by rising food prices

(Year-on-year change, in percent)

FDI inflows have systematically underperformed.

(Net FDI in millions of US dollars)