Georgia and the IMF

News Brief: IMF Approves US$11 Million Disbursement to Georgia Under PRGF Loan

Country's Policy Intentions Documents

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile



Georgia—Letter of Intent

Tbilisi, October 9, 2001

The following item is a Letter of Intent of the government of Georgia, which describes the policies that Georgia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Georgia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.
 

Use the free Adobe Acrobat Reader to view the Tables (207 Kb pdf file).

Mr. Horst Köhler
Managing Director,
International Monetary Fund,
Washington, D.C., 20431

Dear Mr. Köhler,

1.  The Georgian authorities have held discussions with Fund staff for the 2001 Article IV consultation and the first review under the 3-year PRGF-supported arrangement, which was approved by the IMF's Executive Board on January 12, 2001. Based on these discussions, this letter reports on progress made in implementing the economic program set out in my letter dated December 6, 2000, and the attached Memorandum of Economic and Financial Policies (MEFP) and Technical Memorandum of Understanding (TMU). Moreover, for reasons discussed further below, we request waivers for end-March 2001 performance criteria on general government tax revenues, expenditure arrears, and net domestic assets of the National Bank of Georgia (NBG), as well as the continuous performance criterion on external arrears. On the basis of performance up to end-September 2001, implementation of prior actions outlined in Attachment A, and the policies described below, we request the completion of the first review under the program and disbursement of the third loan under the PRGF-supported arrangement.

2.  Despite progress in implementing the macroeconomic policies and structural reforms set out in our economic program, not all objectives were achieved during the first quarter of 2001, primarily due to a shortfall in tax revenues. As a result, end-March performance criteria on general government tax revenues and expenditure arrears monitored under the program were missed. However, revenues recovered in the second and third quarters, due to a recovery in economic growth and improvements in collection ratios. This has brought macroeconomic performance back on track, based on revised quantitative indicators agreed with Fund staff in early May 2001 (Table 1). The revised program reflects the revenue shortfalls at the beginning of the year and prospective financing shortfalls throughout the year. Before the completion of the first review, parliament is expected to approve a revised budget for 2001 that reflects these shortfalls and reduces expenditure commitments accordingly.

3.  Structural reforms in the fiscal, financial, and energy sectors are critical for maintaining medium-term macroeconomic stability. Progress has been made in implementing the specific reforms monitored under the PRGF-supported program, listed in Table 2. These reforms are also a key element in our efforts to strengthen governance. Further steps include specific short-term anti-corruption measures laid out in Presidential Decree No.95 and additional measures laid out in Presidential Decree No. 758. We have discussed with Fund staff the progress we have made in preparing the full Poverty Reduction Strategy Paper (PRSP).

4.  I am confident that the measures described below are adequate to achieve the broad objectives of the program. The government and the National Bank of Georgia will take any other measures that may become appropriate for this purpose. The government will continue to consult regularly with the Fund concerning additional measures that may become appropriate and will provide the Fund with such information as the Fund requests in connection with the progress of Georgia implementing the policies and reaching the objectives of the program supported by the PRGF arrangement. Georgia will conduct discussions with the Fund for the second semi-annual review of its program before February 2002.

Performance Under the Program

5.  Macroeconomic indicators remain broadly in line with program assumptions. GDP growth is projected to accelerate from a rate of 1¾ percent in 2000 to 4 percent in 2001, as a result of an expected rebound in the agricultural sector, following last year's drought, and further growth in service sectors. The industrial sector contracted sharply in the first quarter, mostly owing to energy supply interruptions, but recovered strongly in the second quarter. Inflation remains in line with program projections, at 4¾ percent in the 12 months to August 2001. The exchange rate was broadly stable in the second and third quarters, after depreciating by 4 percent in the first quarter. The National Bank of Georgia has maintained a floating exchange rate regime, but has purchased foreign exchange, whenever market conditions permitted, in order to build its reserves. The improvement in the current account seen in 2000 is not expected to continue this year, given weak trade data for the first quarter and downside risks related to economic problems in Turkey and the introduction of a visa regime by Russia.

6.  Under the original program approved in January 2001, cumulative targets for end-March and end-June on tax revenues and expenditure arrears were missed by significant margins, due a shortfall in fiscal revenues in the first quarter. The reasons for the shortfall included weaker than expected economic activity; continued problems in tax and customs administration, especially in the area of excise collections; and reductions in cigarette excise rates and automobile registration fees. The monetary program, by contrast, remained broadly on track, although there was a minor deviation from the net domestic assets target at the end of March, largely because of longer than expected delays in external financing. There was a larger deviation from the cumulative target under the original program on net domestic assets at the end of June, partly due to higher than programmed net credit to government and partly due to valuation changes. Net international reserves were well above the program floor, both at the end of March and at the end of June, despite shortfalls in external financing.

7.  In addition, the continuous performance criterion on external arrears was breached, when Georgia did not make an interest payment of US$0.4 million to Armenia on time, in the context of bilateral debt negotiations, and after a payment of US$0.06 million due to the Netherlands was withheld pending the clarification of legal issues. The government also requested a delay in US$ 0.7 million in interest payments to Austria, to which Austria agreed. These payments have now been made. Georgia has not paid interest on principal arrears to Turkmenistan, pending a bilateral rescheduling agreement that would determine the appropriate rate of interest. Georgia has also not made any cash payments on scheduled interest due to Turkmenistan, but has made in-kind payments that exceed the amount of scheduled interest due in 2001.

8.  Following the deviations from the original program in the first quarter of 2001, a revised program was developed with Fund staff in May (Table 1), reflecting revenue shortfalls during the first four months and prospective shortfalls in external financing for the year as a whole. An acceleration of economic growth and improvements in collection ratios helped bring tax revenues back in line with flow targets under the original program from June onwards. Overall macroeconomic performance, monitored on a monthly basis since end-March 2001, has been in line with the revised program through end-August.

Fiscal Policy

9.  Before the completion of the first review, parliament is expected to approve a revised budget for 2001, in line with the revised macroeconomic program, to reflect weaker than expected tax revenues at the beginning of the year and a downward revision of external financing projections by about 2 percent of GDP (mainly related to World Bank disbursements and telecommunications privatization). For the year as a whole, the revisions imply general government tax revenues of 14¾ percent of GDP, up from 14¼ percent in 2000; current expenditure commitments of 16¼ percent of GDP, down from 18¼ percent in 2000; a commitments deficit of about 1¼ percent of GDP; clearance of expenditure arrears accumulated in early 2001; and additional payment of pre-2001 arrears of ¼ percent of GDP. Any deviations from projected external financing will continue to be accommodated through adjustments to net credit to government, subject to a cap on cumulative upward adjustment of lari 40 million.

10.  The 2002 budget will reflect continued fiscal adjustment, with an increase in the tax-to-GDP ratio of ½ percent of GDP and a significant reduction in the commitments deficit. The cash deficit would be about 1 percent of GDP, reflecting limited external financing and no additional net credit from the NBG, so that it can control monetary growth while bolstering net international reserves. The budget would provide for a modest payment of pre-2001 arrears, all in the social area, which would be enhanced if external financing exceeded projections. Achieving a sustained improvement in tax and customs collections will be critical to ensure that social spending can grow. Apart from continued structural reforms in the fiscal area, we are planning to introduce a comprehensive reform of the tax code, with effect from January 2002, which would simplify the tax system and broaden the tax base by reducing exemptions. Although the reform would include cutting some tax rates, increasing of tax thresholds, and removing some taxes altogether, the reform will be designed to be at least revenue-neutral, which will require the introduction of simplified and presumptive taxes for small and medium-sized enterprises and the removal of many exemptions

Monetary Policy

11.  The NBG will maintain a prudent monetary policy, in line with revised program targets. Higher than expected foreign exchange purchases and monetary growth in late 2000, without a noticeable impact on inflation, have allowed room for an upward adjustment of the reserve money target for end-2001, while keeping the rate of growth of reserve money at 5½ percent for the year as a whole and 7½ percent during the second half of the year. The NBG has issued additional credit to the government, on account of delays in external financing, repayable from the proceeds of future external inflows. The NBG will maintain its policy of non-intervention in support of the exchange rate, while purchasing foreign exchange, whenever market conditions permit, to build reserves to a level covering about 1¼ months of imports of goods and services by end-2001. The monetary program for 2002 is based on a further increase in gross reserves, to 1½ months of imports, and on reserve money growth of about 10 percent, consistent with an inflation objective in the range of 4 to 6 percent.

Balance of Payments and External Debt Issues

12.  The government is seeking to conclude bilateral debt rescheduling agreements in line with the Paris Club agreement reached on March 6, 2001. Under this agreement, principal payments on bilateral external debt contracted prior to November 1999 falling due in 2001 and 2002 would be rescheduled over 20 years, with a 3-year grace period and a graduated repayment schedule. As of September 30, final or draft agreements have been reached with eight creditors and discussions are continuing with five others. If no agreement is reached with Turkmenistan by the end of the Paris Club deadline, which we have asked to be extended to December 31, 2001, we will transfer interest payments due to Turkmenistan into an escrow account, until agreement is reached.

13.  While the Paris Club rescheduling has allowed Georgia to close potential balance of payments and fiscal gaps in 2001, we recognize that the debt problem is long term in nature. In our discussions with Fund staff, we have reviewed revised medium-term macroeconomic scenarios and concluded that the policies laid out in the PRGF-supported program, with the focus on sustained fiscal adjustment, are critical for ensuring debt sustainability. In this context, we remain committed not to contract or guarantee any new non-concessional debt, as specified in the PRGF-supported program. In addition, we will continue to pursue fiscal and monetary restraint in line with program targets so as to keep external financing needs low. We will maintain a liberal trade regime and we are planning to reduce a number of tariff rates. We understand that any export bans on export items would undermine the rationale for financial support from the Fund. Following parliament's recent resolution imposing a moratorium on timber exports until the end of the year, we have submitted proposals to parliament to address the problem of illegal tree cutting through law enforcement measures. We are working closely with parliament and the World Bank to ensure that effective measures are put in place and that legally cut timber can be freely exported. We are also actively seeking support from bilateral donors and multilaterals to enhance the availability of concessional project and non-project financing, in support of the PRGF-supported economic program. In this context, the government is committed to fulfill its obligations under the World Bank's SAC and ESAC programs, to release disbursements in 2001, as assumed in the revised budget.

Structural Reforms and Poverty Reduction

14.  The discussions for the first review under the PRGF arrangement focused on progress in strengthening governance and fighting corruption. Ongoing reforms of fiscal and financial institutions, described in the paragraphs below, are helping to improve governance in areas that are critical for maintaining macroeconomic stability. In addition, Presidential decree No.95, effective from March 15, 2001, specifies short-term measures to combat corruption. These include measures to improve transparency, including by broadening financial disclosure, clarifying the role of government regulatory agencies, introducing internal audits of government agencies, and requiring publication of their expenditures. The newly established anti-corruption commission has published a progress report on the implementation of decree No.95. A second Presidential Decree, No. 758 was issued on July 27, 2001, with a focus on strengthening transparency in government agencies.

15.  Table 2 summarizes progress in implementing the structural benchmarks I outlined in my letter, dated December 6, 2000, which are monitored under the PRGF-supported program. Given the critical role of fiscal adjustment in the macroeconomic program, structural benchmarks are focused primarily on this area. In order to strengthen governance in revenue raising agencies, we will adopt a code of conduct for tax and customs officials prior to the completion of the first review. To strengthen customs revenues, we have tightened procedures for granting customs exemptions, after the introduction of a monitoring unit. In addition, we have made progress in strengthening the VAT refund system and are monitoring refund claims and payments. We will issue a regulation that clarifies the selection criteria for the large tax payer inspectorate. On the expenditure side, we have introduced commitments recording and control in all budgetary organizations except utilities and embassies and are preparing to include utilities from the beginning of 2002. We have audited expenditure arrears in all central budgetary organizations.

16.  We are continuing to reform the tax and customs agencies, as well as the treasury system. We will implement legislative and administrative changes to transfer full control over tax refund system to the treasury next year, including through closure of transit accounts controlled by the ministry of revenues. Our reform efforts are being supported by a Fund resident advisor to the treasury, who took up his post in June, 2001. He is helping with efforts to revise the budget system law; to monitor expenditure arrears; and to improve the monitoring and controlling of tax revenues, including by addressing problems with prepayments and refunds. To further strengthen fiscal governance and transparency, Parliament is expected to approve the new budget system by end-February 2002, as a structural performance criterion. We remain committed to refrain from tax offset operations.

17.  A second priority area is the continuation of structural reforms in the banking sector. The NBG has made progress in strengthening the sector, including by withdrawing licenses from six problem banks since the beginning of the year. The NBG has also issued new asset classification and provisioning regulations for commercial banks in order to improve the transparency of balance sheets and strengthen the NBG's ability to supervise the sector. Since February 2001, commercial banks have been required to submit their monthly reports to the NBG according to International Accounting Standards (IAS). The NBG has also issued conflict of interest regulations for banks, in order to strengthen governance and transparency in the financial sector. The NBG's supervisory capacity, especially in dealing with problem banks, will be further strengthened by amendments to the central bank and commercial bank laws, expected to be approved by parliament prior to the completion of the first review, that establish the primacy of banking law in bank-related matters. By end-December 2001, with technical assistance from the monetary and exchange affairs department, the NBG will develop an analytical framework for the resolution of insolvent banks, as a structural benchmark.

18.  The energy sector remains a serious economic problem. Not only are frequent power outages hindering economic growth, but the high level of energy debts is threatening to undermine fiscal policy. We have embarked on an ambitious reform program, supported by the World Bank and other international agencies and donors, focused on private sector involvement. There was insufficient support in parliament to approve an amendment to the energy law we had submitted last year, which would have enabled the regulator to impose a debt surcharge on the electricity tariff. We are therefore revising our strategy for resolving the sector's old debts with technical assistance from the World Bank and will discuss the strategy with Fund staff prior to the completion of the second review.

19.  In view of our efforts to combat poverty, we have made progress in preparing the full PRSP. The paper will outline priority reform areas and discuss funding and financial constraints. A first draft was shared with the World Bank, the IMF, and international donors. Non-governmental organizations, the media, and civil society are actively involved in the process. We expect that the budget for 2002 will be generally consistent with the main directions of the draft strategy, although the implementation of the strategy is expected to take more time. We will continue to seek technical assistance from multilateral institutions and bilateral donors in this effort.

Program Monitoring

20.  Disbursement of the third loan under the PRGF-supported arrangement is requested upon completion of the first review, which will require implementation of prior actions outlined in Attachment A and waivers for end-March 2001 performance criteria on general government tax revenues, expenditure arrears, and net domestic assets of the National Bank of Georgia (NBG), as well as the continuous performance criterion on external arrears. The PRGF-supported program will continue to be monitored under the terms laid out in my letter dated December 6, 2000, with the attached MEFP and TMU, subject to the following qualifications. New quantitative performance criteria have been established for end-December 2001, based on cumulative changes from end-March 2001 (Table 1). The TMU has been amended to define more precisely the adjuster for deviations from external financing, to clarify the program treatment of offset-based external debt amortization, to define more precisely the term "external debt," to define more precisely budgetary arrears monitored under the program, and to specify caps on adjusters for end-December 2001. The second review will take place at end-February 2002, with a focus on tax reform, strengthen-ing the banking sector, and energy debt restructuring. We request that disbursement of loans under the PRGF-supported arrangement be re-phased so that the fourth loan would become available upon completion of the second review, based on end-December performance criteria, and the fifth loan would become available upon completion of the third review, scheduled for May 2002, based on end-March 2002 performance criteria.

Yours truly,

/s/
Eduard Shevardnadze

Use the free Adobe Acrobat Reader to view the Tables (207 Kb pdf file).


 

Prior Actions for Completion of the First Review Under the PRGF Arrangement

1.  Satisfactory macroeconomic performance relative to agreed quantitative targets through end-September.

2.  Adoption by parliament of a revised budget for 2001 fully consistent with the revised macroeconomic framework described in this letter.

3.  Adoption of a code of conduct for tax and customs officials.

4.  Adoption by parliament of amendments to the central bank and commercial bank laws to establish the primacy of banking law in bank-related matters.

Structural Performance Criteria and Benchmarks

Benchmarks

1.  Adoption of an analytical framework for resolution of insolvent banks (December 31, 2001).

2.  Apply standard expenditure control procedures to off-budget accounts outside the treasury (January 1, 2002).

Performance Criterion

1.  Adoption, by February 28, 2002, of a budget system law that provides a sound legal framework for:

  • budget preparation, presentation and approval;

  • budget execution;

  • government borrowing and debt;

  • budget accounting, inspection, and auditing.


 

Technical Memorandum of Understanding (TMU)

October 9, 2001

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 for the arrangement supported under the Poverty Reduction and Growth Facility (PRGF) reported in Table 1 of the Letter of Intent (LOI) dated October 9, 2001, as well as respective reporting requirements. It also provides definitions and reporting requirements for the continuous performance criteria described in paragraph 53 of the Memorandum of Economic and Financial Policies (MEFP) attached to the Letter of Intent, dated December 6, 2000.

2.  The quantitative performance criteria (ceilings and floors) and indicative targets listed in Table 1, Sections 1 and 2, of the LOI are defined as cumulative changes from end-March 2001. Some floors and ceilings are adjusted by cumulative deviations of certain external financing flows from projections (Table 1, Section 3), converted at an accounting exchange rate of lari 2 per U.S. dollar.1 The program relies on adjusters that are symmetric and allow the substitution of net external non-project financing for net domestic credit to government (and net domestic assets of the NBG). However, any resulting increases in net domestic credit to government and net domestic assets of the NBG are subject to a cap. The program also allows for an automatic adjustment to the cash deficit target in case of deviations of external project financing from expectations, subject to a cap on upward adjustment.

3.  While the adjustment mechanism is designed to accommodate unanticipated, temporary fluctuations in external financing, the caps imply that significant shortfalls in financing will require policy changes, including tighter fiscal policy, which would need to be considered in the context of a program review.

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

A.  Floor on Tax Revenues

4.   Definition: Tax revenues are defined as total tax collections by the State Tax Department and the State Customs Department, including tax revenues from the central government, local governments, and extrabudgetary funds. The tax revenues are recorded when these are paid into the treasury's revenue account(s) in the National Bank of Georgia (NBG). The tax revenues exclude the amounts retained by the revenue agencies for bonus payments.

5.   Adjustment clauses: Once a change is made in accounting practices so that the bonus payments to the revenue agencies are included in the treasury's revenue account(s), the revenue targets will be adjusted upward by the applicable bonus share.

6.   Supporting material: The Ministry of Finance (treasury) will provide data showing a detailed breakdown of tax revenues paid into the NBG revenue accounts (form 412) on a monthly basis within two weeks of the end of each month. The local budget department in the Ministry of Finance will provide additional information on revenue collections of local governments. The authorities will also provide data on any offset transactions on a monthly basis.

B.  Indicative Target for Revenues from Cigarettes and Petroleum

7.   Definition: This is defined as the total of customs duties, excise duties, and VAT collected by the State Tax Department and the State Customs Department on the domestic production and imports of cigarettes and petroleum products.

8.   Adjustment clauses: None.

9.   Supporting material: The Ministry of Finance will provide data with a break-down into the main categories of products on a monthly basis within two weeks of the end of each month.

C.  Ceiling on Expenditure Arrears

10.   Definition: Expenditure arrears are defined as a subset of arrears incurred by the general government on the following expenditure items: wages and salaries; pensions; health programs and invalid NGO programs; family allowances; stipend and food compensations; refugee allowances; transfers to SMIC; and transfers to the employment fund. Once sufficient progress is made on introducing commitments recording in the treasury, the measurement of arrears will be strengthened by applying the following principles for recording expenditure arrears: (a) the goods and services have been received; (b) these have been certified to conform to the order of the contract; (c) the bill for payment has been received; and (d) the bill has remained unpaid beyond the normal or agreed period of credit. Until then, the net change in arrears will be estimated as the difference between actual cash spending and the monthly cash limits issued to spending units prior to the beginning of the month.

11.   Adjustment clauses: None.

12.   Supporting material: The Ministry of Finance (treasury) will provide monthly data, with a detailed break-down by economic and organizational category, on cash spending and commitments made by the central government, and/or cash limits issued to the spending units. The information on cash limits and spending commitments will be provided within two weeks from the beginning of each month. The information on cash spending will be provided within four weeks of the end of each month. The local budget department in the Ministry of Finance will provide information on monthly spending by the local budgets, and the extrabudgetary funds will provide information, through the Ministry of Finance, on their monthly expenditures.

D.  Ceiling on the Cash Deficit of the General Government

13.   Definition: The cash deficit of the general government will be measured from "below-the-line", equal to the total financing (domestic and external, plus privatization proceeds) received by the general government.2 Privatization receipts consist of all gross proceeds received by the central and local governments. Domestic financing consists of all bank and non-bank financing to the general government. External financing is defined as the total of disbursements, macroeconomic support, net change in arrears, minus amortization. Disbursements include all project financing (capital expenditure and net lending) and balance of payments support (excluding grants) received by the budget. Amortization includes all external debt-related payments of principal; amortization to external creditors via third parties is accounted for at the time and in the amount of payment by the budget to the third party, rather than at the time of recognition of amortization by the external creditor.

14.   Adjustment clauses: The ceiling will be adjusted to reflect cumulative deviations from program assumptions on external project financing for capital expenditure or net lending minus grants for debt operations (see Table 1, Section 3). The ceiling at the end of a quarter will be adjusted upward (downward) by the full amount of the cumulative excess (shortfall) of external project financing minus grants for debt operations. There will be a cap on cumulative upward adjustment of lari 80 million.

15.   Supporting material: Data on privatization receipts will be provided by the Ministry of Finance (treasury) on a monthly basis within two weeks of the end of each month. The data will be consistent with the revenue account(s) in the NBG (form 412). Data on domestic financing (bank and non-bank) will be provided by the NBG. Until further improvements in the NBG accounts, the treasury will provide information on Ministry of Finance guaranteed loans (including guaranteed amount, principal repayment schedule, and actual principal and interest payments). Data on external project financing and debt reduction grants will be provided by the Ministry of Finance in a table on project and grant disbursements by creditor, on a monthly basis within two weeks of the end of each month.

E.  Ceiling on Net Credit of the Banking System to the General Government

16.   Definition: Net credit of the banking system to the general government includes net credit to the general government from the NBG and the deposit money banks. General government is defined in this context as the central government, local government, and extrabudgetary funds. Credit to the government includes: all loans to the general government, all treasury bills issued by the general government (including those purchased by the central bank), as well as all government-guaranteed loans from the banking system to other entities. Net credit to the government is credit to the government less deposits of the general government in the banking system. In addition, any accrued government interest obligations to the NBG would be reflected in net credit to the government. Government bonds issued to cover NBG losses are excluded from net credit to the government.

17.   Adjustment clauses: The ceiling on net credit of the banking system to the general government will be adjusted to reflect cumulative deviations from program assumptions on net external non-project financing (see Table 1, Section 3), which is defined as the sum of all foreign-currency denominated privatization receipts and disbursements under the World Bank's SAC and ESAC programs, minus external amortization payments by the general government. Amortization payments are recorded at the time and in the amount of actual amortization-related payments made by the general government, net of grants or other support received to offset amortization payments. The ceiling at the end of a quarter will be adjusted upward (downward) by the full amount of the cumulative shortfall (excess) of net external non-project financing, subject to a cap on cumulative upward adjustment of lari 40 million.

18.   Supporting material: The NBG will provide the monetary survey on a monthly basis within two weeks of the end of each month. The NBG will also provide information on the activities of the treasury bill market. The necessary information on net external non-project financing will be provided in a table on the NBG's foreign exchange flows (which includes details on inflows, outflows, and net international reserves) on a monthly basis within a week of the end of each month. The Ministry of Finance will provide additional information on the repayment of principal and interest on government-guaranteed loans from commercial banks on a monthly basis.

F.  Ceiling on Net Domestic Assets of the NBG

19.   Definition: Net domestic assets of the NBG are defined as the difference between net foreign assets and reserve money. Net domestic assets include net claims on government (including loans and treasury bills purchased by the NBG, accrued government interest obligations to the NBG, less deposits of the government with the NBG.), claims on banks, claims on the rest of the economy (including the KfW loan), and other items net (including the NBG capital accounts, net unclassified assets, counterpart funds and exchange rate revaluation).

20.   Adjustment clauses: The ceiling on net domestic assets of the NBG will be adjusted to reflect cumulative deviations from program assumptions on net external non-project financing (see Table 1, Section 3), which is defined as the sum of all foreign-currency denominated privatization receipts and disbursements under the World Bank's SAC and ESAC programs, minus external amortization payments by the general government. Amortization payments are recorded at the time and in the amount of actual amortization-related payments made by the general government, net of grants or other support received to offset amortization payments. The ceiling at the end of a quarter will be adjusted upward (downward) by the full amount of the cumulative shortfall (excess) of net external non-project financing, subject to a cap on cumulative upward adjustment of lari 40 million.

21.   Supporting material: The NBG will provide data on its balance sheet, which includes data on its net domestic assets, on a monthly basis within one week of the end of each month. The necessary information on net external non-project financing will be provided in a table on the NBG's foreign exchange flows (which includes details on inflows, outflows, and net international reserves) on a monthly basis within one week of the end of each month.

G.  Floor on Net International Reserves of the National Bank of Georgia (NBG)

22.   Definition: Net international reserves (NIR) of the NBG in U.S. dollars are calculated on the basis of assets and liabilities of the NBG, using program assumptions of bilateral exchange rates (2 lari per U.S. dollar and 1.35 U.S. dollar per SDR). NIR of the NBG are defined as liquid, convertible currency claims of the NBG on nonresidents 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 reserve assets. Reserve liabilities include the use of Fund resources and any other liabilities of the NBG. The stock of NIR in period t is calculated as the stock of NIR in period (t-1) plus the net inflow of foreign exchange in period t, the change in the value of gold stock at market prices in period t, and the change in the stock of liabilities to the IMF and other creditors in period t.

23.   Adjustment clauses: The floor of net international reserves will be adjusted to reflect cumulative deviations from program assumptions on net foreign-currency non-project financing (see Table 1, Section 3), which is defined as the sum of all foreign-currency denominated privatization receipts and disbursements under the World Bank's SAC and ESAC programs, minus external amortization payments made in foreign currency by the general government and NBG. Amortization payments are recorded at the time and in the amount of actual amortization-related payments made, net of grants or other support received to offset amortization payments. For a shortfall (excess) of net external non-project financing, the floor on NIR will be adjusted downward (upward) by the full amount, subject to a cap on cumulative downward adjustment of US$32.5 million.

24.   Supporting material: Data on net international reserves and data on net foreign-currency non-project financing will be provided in a table on the NBG's foreign exchange flows (which includes details of inflows, outflows, and net international reserves) on a monthly basis within the week following the end of the month.

H.  Ceiling on Contracting or Guaranteeing New Non-Concessional Medium- and Long-term External Debt by the Public Sector (with original maturity of 1 year or more)

25.   Definition: The public sector consists of the central government, the National Bank of Georgia (NBG), and local authorities. Concessional external loans are defined as loans with a grant element of at least 35 percent of the value of the loan. The grant element is to be calculated by using currency-specific discount rates reported by the OECD (CIRRs).3 For maturities of less than 15 years, the grant element will be calculated based on six-month averages of commercial interest rates. For maturities longer than 15 years, the grant element will be calculated based on 10-year averages. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received.4 Previously contracted non-concessional external debt that has been rescheduled shall be excluded from the definition of "new debt" for the purposes of this performance criterion.

26.   Adjustment clauses: None.

27.   Supporting material: Details of all new commitments and government guarantees for external borrowing, with detailed explanations, will be provided by the Ministry of Finance on a monthly basis within two weeks of the end of each month.

I.  Ceiling on Contracting or Guaranteeing Short-Term External Debt by the Public Sector (with original maturity of 1 year or less)

28.   Definition: The public sector consists of the central government, the National Bank of Georgia (NBG), and local authorities. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000), see footnote for Section H, but also to commitments contracted or guaranteed for which value has not been received.

29.   Adjustment clauses: None.

30.   Supporting material: Details of all new commitments and government guarantees for external borrowing, with detailed explanations to be provided by the Ministry of Finance on a monthly basis within two weeks of the end of each month.

J.  Non-accumulation of External Arrears

31.   Definition: During the period of the arrangement, the general government and the NBG will not accumulate any new external payment arrears. Official arrears on external debt service obligations include any non-payment of interest and/or principal in full and on time falling due to all creditors, including the Fund, the World Bank, and other official creditors.

32.   Adjustment clauses: None.

33.   Supporting material: Details of official arrears accumulated on interest and principal payments to creditors will be reported within one week from the date of the missed payment.

K.  Non-introduction of exchange and trade restrictions

34.   Definition: During the period of the arrangement the general government and the NBG will not impose or intensify restrictions on payments and transfers for current international transactions; will not introduce multiple currency practices; will not conclude bilateral payments agreements that are inconsistent with Article VIII; and will not impose or intensify import restrictions for balance of payments purposes.

35.   Adjustment clauses: None.

36.   Supporting material: The government and NBG will inform the Fund about any changes to the exchange and trade regime.

L.  Indicative Target for Reserve Money

37.   Definition: Reserve money is defined as currency in circulation and required reserves of deposit money banks and balances on banks' correspondent accounts.

38.   Adjustment clauses: None.

Supporting material: The central bank balance sheet is to be transmitted on a monthly basis, within one week of the end of the month.


1For instance, if a disbursement of $10 million originally projected to accrue in the first quarter is delayed until the second quarter of 2001, then an adjuster of $10 million (lari 20 million) would apply to end-March targets, but not to end-June, when net external financing would have returned-on a cumulative basis-to the originally projected level. In practice, this means that a delay in external financing inflows can be compensated temporarily by higher domestic credit, but not permanently, implying a repayment to the NBG once the delayed disbursement accrues.
2Modest differences between the recorded financing and the cash deficit, calculated as expenditures plus net lending minus revenues and grants, can be attributed to check-float and smaller errors and omissions.
3An electronic spreadsheet file that shows the relevant discount rates reported by the OECD (CIRRs) will be provided on a periodic basis by Fund staff.
4The definition of debt set forth in No. 9 of the 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 some time 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 lessor 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."

-->