Transcript of a Conference Call on Georgia
With David Owen, Senior Advisor
Request for Standby Arrangement
Ana Lucia Coronel, Advisor and Mission Chief
Middle East and Central Asia Department
Monday, September 15, 2008
MR. BÜNEMANN: Good afternoon to everyone and good evening if we have some participants from farther eastwards.
I'm Niels Bünemann of the IMF External Relations Department. I am here together with two colleagues from the International Monetary Fund's Middle East and Central Asia Department. David Owen is Senior Advisor, and Ana Lucia Coronel is Advisor as well as Mission Chief for Georgia.
We're now going to talk about the IMF's Executive Board's decision to approve a standby arrangement with Georgia. We have issued a press release on this just half an hour ago, and what is said here in this conference call is free for use in your publications immediately after the conference call. I will now turn over to David Owen who will give you a short introduction, and after that David and Ana Lucia will take your questions. David?
MR. OWEN: Thank you, Niels. So, as you are aware from the press release we've just issued, the IMF's Executive Board this morning approved a new credit facility for Georgia. This facility takes the form of what we call a standby arrangement that will make it possible for Georgia to draw up to US$750 million over the next 18 months. The Georgian authorities requested the standby arrangement to help address the serious economic challenges that the country now faces, following the armed conflict in August.
There has, of course, been substantial physical damage to the country as a result of the conflict, and that's still being assessed. But perhaps most damaging is the potential impact of the conflict on investor confidence, and that is what the IMF program is designed to address. Signs of nervousness by investors have already been evident in a decline in international reserves, a fall in bank deposits and wider spreads on international bonds issued by Georgia.
The support from the IMF is intended to provide the financing needed to rebuild the international reserves and to bolster investor confidence, and the amount that will be made available, US$750 million, is well above the normal limits that apply for IMF lending arrangements because of the exceptional pressures that Georgia is now facing.
Let me now very briefly turn to the IMF staff's assessment of the economic situation in Georgia and the authorities' policy plans.
Georgia's near-term growth prospects have obviously been hit by the armed conflict in August, but we think the economy is well placed to recover from the shock. The impressive record of adjustment and reform over recent years has strengthened the structure of the economy and its ability to deal with the economic consequences of this shock.
Before the conflict, economic growth was running in double digits. With such strong growth, there were inevitably inflationary pressures, but the central Bank was bringing these under control. The external current account deficit was large, but it was fully financed by private capital inflows and, in particular, foreign direct investment. By bolstering investor confidence, the IMF program aims at sustaining these private capital inflows which have been critical to Georgia's growth performance in recent years.
The authorities' program has three main policy elements: First, in the area of fiscal policy, the authorities intend to reduce lower priority public spending in order to make room to spend more on reconstruction while limiting the overall fiscal deficit. Second, in the area of monetary policy, they will ensure that there is adequate liquidity in the banking system and they will maintain a stable national currency, the lari. And, third, they will take steps to further strengthen the country's banking system which has so far proved quite resilient to the conflict.
With this summary of the situation and the program, Ms. Coronel and I would now be happy to try to answer your questions.
QUESTIONER: Yes. I had a slightly broader IMF question about which was I was talking to one of the Executive Directors a while ago who was saying this would be perhaps one of the fastest loans to be approved from the start of the process to the end. I'm not sure whether you can give me any sort of confirmation or details on that, whether that's actually the case.
MR. OWEN: Well, I can't confirm whether it is the fastest, but I can certainly say that this has been done quickly, and that reflects the urgency of the situation that the authorities faced.
We got a call, a request for a mission to travel to Tbilisi in mid-August. We went there within a few days, and we were able to reach agreement during that visit, and then we invoked a procedure to process the Board documents and move forward with the Board decision at a very fast pace. So I can confirm that it has been quicker than normal.
QUESTIONER: Hi. I was wondering what you think the repercussions are of this conflict for the region. So not only what you're seeing in Georgia, but what about for the region?
Also, what about issues regarding reforms in Georgia? You know one of the big underpinnings of Georgia's economy has been the reforms. I gather that those would continue and were there discussions about that?
MR. OWEN: Well, regarding the impact on the region, certainly during the conflict and in the period after that there were some implications for neighboring countries, particularly Armenia and Azerbaijan, from restrictions in trade through Georgia. Both countries do a significant amount of trade through Georgia, and that was interrupted and delayed during the conflict. So there have been implications there. My understanding is that those problems have been resolved quickly.
More broadly than that, conflicts like this can always have implications for the region through financial markets, and through possible impacts through commodity prices. There are important oil and gas pipelines through Georgia. So those risks are always there, but at this point I think that they appear to be contained, and the implications of the conflict are primarily for Georgia.
As far as the reforms are concerned, yes, I think that the authorities are very strongly committed to continuing with their very strong reform program. They have, of course, done a tremendous amount already, and just last week the World Bank issued its latest Doing Business Survey which placed Georgia at 15th place in the world in terms of the friendliness of the business environment. So that, I think, is testimony to the reforms that have already been completed.
As regards the program in particular, the discussions that we had with the authorities focused on further reforms to strengthen the financial sector, and the authorities are strongly committed to pushing ahead with those.
QUESTIONER: Could I just have a follow-up?
There have been a few weeks since the actual conflict seemed to end, although there are still diplomatic tensions. Have you got a sense yet over the last few weeks that investors are coming back or that they're staying away, and what's their main reason for staying away?
MR. OWEN: Well, I think there's really no direct evidence on what investors are doing at this point. The concrete data takes time to come in.
What we have observed, as I mentioned in my statement, was initially some decline in the international reserves and some decline in bank deposits. The declines in both of those were concentrated in the period during and immediately after the conflict, and what we've seen in the last two or three weeks is stability in both of those areas. So I think that the authorities, by taking very effective measures to underpin confidence, have stabilized the situation.
As I said, I don't think there's any concrete evidence that investors are coming back yet, but we wouldn't expect to see that yet.
QUESTIONER: Do you have a figure for the reserves, what they went to and what they are now?
MR. OWEN: I think that the authorities publish the reserves at the end of each month. I think that's something that you would have to ask the authorities about.
MS. CORONEL: Well, I just wanted to add that the investors' confidence is going to be bolstered by this willingness of the authorities to continue with the reform program in the medium term. I think everybody understands that an immediate reaction to the shock is to adjust some of the policies to that, but in the long term they will continue with the reforms they were planning.
In the short term, their main priority is to address the situation, the liquidity situation, and other immediate consequences of this conflict.
QUESTIONER: Whether the situation as you see that the markets are, well, obviously not any global markets but also the Russian markets have been destabilized recently. Will that have any effect, do you think, on Georgia's recovery going ahead?
MR. OWEN: Well, I think that certainly one uncertainty for the future for Georgia is the international global financial environment, and it's one factor that will affect the extent to which investor confidence will revive and capital inflows will resume.
But I think that it's probably not the critical factor for Georgia. I think that, for example, since the global credit squeeze began last year, Georgia has been little affected by that. Capital inflows and confidence in the Georgian economy was sustained and, indeed, increased very strongly in the first half of this year when capital inflows reached a record level. And, I think the critical thing for investors will be specifically their belief that the Georgian economy has a sound future and that strong policies will be maintained.
QUESTIONER: I was also interested where the government plans to cut spending.
MS. CORONEL: I think what the government wants to do from now on is to cut current spending and to emphasize reconstruction and relief spending. So that is a very good adjustment in terms of the quality of spending.
QUESTIONER: Okay. So no specific areas?
MS. CORONEL: The specific areas in which they want to increase spending is for relief, for example, for addressing the needs of displaced persons and for the reconstruction effort.
QUESTIONER: Okay. I just have one more last question.
You mentioned that there's going to be additional multilateral and bilateral assistance. Do you have any idea what that is yet and is IMF part of the World Bank assessment group and any comments on that yet?
MR. OWEN: Are you referring to the World Bank, the needs assessment mission led by the World Bank?
QUESTIONER: The needs assessment, correct. Yes.
MR. OWEN: We cooperate very closely with the World Bank, the World Bank team. There was a World Bank team in Georgia when the IMF team was there.
We're not actually a part of the team that's doing the needs assessment because that type of work is not really part of the IMF's area of responsibility, its mandate, but we are keeping in very close touch with the World Bank and aware of its work.
QUESTIONER: Right. Then you don't know what the loans and grants, the concession loans and grants coming down the pipeline, how much that is in addition to what you've given already?
MR. OWEN: Well, I mean other donors and other multilateral organizations are in the process of making announcements and deciding what their contribution will be. We don't have any concrete information on that beyond the information that was made available by those donors.
MR. BÜNEMANN: Right. I think we have covered the aspects that the conference participants wanted to address. So I would like to thank everybody who participated and we will have a transcript of the conference call on the IMF web site but probably not today. Tomorrow, I would guess it's feasible.
Thank you very much for participating.
IMF EXTERNAL RELATIONS DEPARTMENT
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