Press Release: IMF Approves US$144 Million PRGF Arrangement for Georgia
June 4, 2004
The Executive Board of the International Monetary Fund (IMF) today approved a three-year arrangement under the Poverty Reduction and Growth Facility (PRGF) in an amount equivalent to SDR 98 million (about US$144 million) to support the government's economic program into June, 2007. The first disbursement of SDR 14 million (about US$21 million) under the arrangement will become available immediately.
The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.
Following the IMF Executive Board discussion, Takatoshi Kato, Deputy Managing Director and Acting Chairman, stated:
"The new Georgian authorities have launched an ambitious reform effort aimed at addressing governance issues, improving the efficiency and effectiveness of the public sector, and strengthening the macroeconomic fundamentals, with a view to achieving long-term economic growth, poverty reduction, and private sector development.
"The centerpiece of the reform program is a decisive attack on corruption to bolster tax collections, thereby allowing the government to eliminate domestic expenditure arrears, while increasing core spending on social projects and infrastructure. Reforms in tax and customs administration underpin the government's revenue efforts. Later this year, the government will seek parliamentary approval of a tax reform, aimed at simplifying the tax structure, broadening the tax base, and eliminating exemptions and nuisance taxes. The strong fiscal performance in the year to date indicates that Georgia is well on track to meet the program's ambitious fiscal targets.
"Restoring the physical and financial viability of the energy sector is a key element of the reform agenda. Improved bill collection should help reduce the sizeable quasi-fiscal deficits in the sector. In addition, the authorities are expected to shortly review the power tariff methodology as a stepping-stone toward the setting of cost-recovery tariffs by the energy regulatory agency. In cooperation with donors, the government is also about to establish a framework for the treatment of domestic legacy debt in the sector.
"Far-reaching reforms of the civil service, state-owned enterprise management, and the foreign trade regime are other important components of the structural reform agenda. The authorities are developing a comprehensive civil service reform strategy, and they have also undertaken to broaden the coverage of international audits to include all major state-owned enterprises and to reverse the protectionist measures introduced in December 2002.
"The monetary authorities will continue to pursue a prudent monetary policy, underpinned by fiscal consolidation and a managed exchange rate float, to keep inflation low and safeguard competitiveness. They will continue their efforts to foster financial deepening and enhance monetary policy tools, in particular by introducing a primary dealer system for government securities in the course of 2004.
"In the near future, Georgia will seek a debt rescheduling with Paris Club creditors and agreements with non-Paris Club bilateral creditors on comparable terms. The authorities intend to pursue prudent external debt management, refraining from contracting or guaranteeing any non-concessional loans during the program period," Mr. Kato said.
Recent economic developments
Georgia's economy proved resilient in 2003, despite a weakening in fiscal performance and a political crisis that culminated in a regime change in November. Real GDP growth, originally reported at 8.6 percent in the program documents, was subsequently revised by the State Department of Statistics to 11.1 percent, led by buoyant activity in the construction and agricultural sectors, as well as several one-off factors. Underlying inflation (3 percent) stayed low in 2003, but headline inflation rose to 7 percent, driven by a spike in wheat import prices stemming from crop failures in CIS exporters. Performance in early 2004 was also strong, with real GDP growing in the first quarter at 9.5 percent and 12-month CPI inflation at 5.2 percent through April 2004.
The fiscal situation deteriorated sharply in 2003. The commitments deficit of the general government (2.5 percent of GDP) was much larger than programmed, leading to a progressive buildup in domestic arrears-mostly on wages and pensions-to nearly 5 percent of GDP by year's end, instead of the programmed reduction. By contrast, fiscal performance in early 2004 was strong, with tax revenue in the year to date exceeding expectations by wide margins. On May 11, Parliament adopted a sound budget for 2004, in line with the broad parameters discussed with Fund staff.
Georgia's economic reform program, which is supported by the new arrangement under the Poverty Reduction and Growth Facility, aims to foster rapid, sustained outward-looking growth in a low-inflation environment, in order to improve living standards and basic service delivery. The centerpiece of the program is a decisive attack on corruption that should underpin gains in tax collections. This should allow the government to eliminate domestic expenditure arrears during the program period, while increasing spending on core social and infrastructure projects. Energy sector reforms should ensure stable power supplies and lower quasi-fiscal losses, while governance improvements and tax reform should foster confidence and SME development.
Program targets for 2004 comprise 6 percent real GDP growth, 5 percent end-period inflation and a modest gain in international reserves, keeping them at 1.5 months of non-pipeline imports, as in 2003. The medium-term outlook through 2008 envisages output growth averaging 5 percent, buoyed by oil and gas pipeline construction, improvements in the business climate that should foster sustained growth in transport and services, and export diversification. Pursuit of prudent monetary policies would keep inflation around 5 percent. According to the PRSP, this would allow a reduction in the share of the population living below subsistence standards from slightly over one-half in 2002 to about one-third in 2008 and one-fifth by 2015.
Georgia became a member of the IMF on May 5, 1992; its quota is SDR 150.3 million (about US$221 million), and its outstanding use of IMF credit currently totals SDR 180 million (about US$265 million).