Press Release No. 07/190

Press Release No. 07/190

An IMF mission visited Georgia May 24-June 1 and issued the following statement on June 1, 2007:

"A mission of the International Monetary Fund (IMF) visited Georgia to review recent economic developments and hold discussions for the sixth and final review under the IMF's Poverty Reduction and Growth Facility (PRGF). The mission met with senior government and National Bank officials, representatives of the private sector, and parliamentarians.

"Georgia's economic performance and macroeconomic management continue to be impressive. Economic growth in 2006 was strong despite the external shock associated with Russia's economic embargo. It is estimated that the economy grew by 9.4 percent last year and it is projected to grow by 10 percent or more in 2007. End-period inflation for 2006 was 8.8 percent and as of end-May 2007, twelve-month inflation was about 7.3 percent. The decline in inflationary pressure since mid-2006 confirms the authorities' commitment to keeping inflation in single digits.

"Georgia's strong economic growth is being driven mainly by private capital inflows, which include a large element of foreign direct investment. While these inflows are welcome, and signal private sector confidence in the Georgian economy, they also give rise to macroeconomic imbalances. Georgia's current account deficit increased substantially in 2006 and is projected to increase further—to as much as 20 percent of GDP—in 2007. While the higher current account deficit largely reflects the rapid growth of imports, partly related to foreign direct investment, the slowing growth of exports was also a contributing factor.

"The large capital inflows also pose challenges for macroeconomic management. In order to meet the authorities' stated objectives of keeping inflation in single digits, the mission stressed the need for careful management of domestic demand. Specifically, the mission urged the government to aim for a reduced fiscal stimulus by implementing a tighter fiscal stance in 2007. While acknowledging the numerous uncertainties confronting macroeconomic management, the mission concluded that on balance the risk factors will likely lead to greater inflationary pressure rather than less.

"The mission also stressed the need for further strengthening of the NBG's supervision of commercial banks. While the commercial banking sector remains strong, the rapid expansion in bank lending requires careful monitoring. To this end, the mission urged the prompt passage of proposed legislation regarding "fit and proper" requirements for bank managers and owners. It also recommended strengthening the Bank Supervision Department at the NBG.

"Based on performance in the first quarter of this year, the IMF mission plans to recommend completion of the sixth review under the PRGF arrangement. It is anticipated that completion of sixth review will be considered by the IMF's Executive Board in late August 2007."