## cr1797 ## Source details **Canonical URL:** [cr1797](https://www.imf.org/-/media/files/publications/cr/2017/cr1797.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr1797.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr1797.pdf.json) --- ### Recent economic developments and macroeconomic outcomes - Real GDP growth: - 2015: 2.9 percent - 2016: 2.7 percent (supported by consumption demand) - Inflation: - CPI, Period average 2016: 2.1 - CPI, End-of-period 2016: 1.8 - End-year inflation 2016: 1.8 percent (below the 5 percent target) - NBG policy rate reductions in 2016: from 8.0 percent to 6.5 percent; January 2017: raise by 25 basis points - External sector: - Current account deficit 2016: -12.4 percent of GDP - Financing: continued to be largely financed by FDI - Gross international reserves 2016: $2.8 billion - Gross external debt 2016: 111.8 percent of GDP (external debt mostly concessional) - Gross external debt, excl. intercompany loans 2016: 87.8 percent of GDP - Lari depreciation vs. USD in 2016: 4 percent (cumulative 27 percent since end-2014) - REER (period average; CPI based, 2010=100) 2016: 107.5 - Fiscal outcomes: - Cash fiscal deficit including net budget lending 2016: 4.1 percent of GDP (above the SBA target of 3.0 percent of GDP) - Overruns in: health (following universal healthcare), defense, tourism, local government (0.9 percent of GDP), and budget lending (0.4 percent of GDP) - Excise and corporate profit taxes: higher-than-envisaged/performed - Banking sector and credit: - Credit grew 12 percent (at constant exchange rate) in 2016 - Deposit dollarization 2016: 69.9 percent - Credit dollarization 2016: 64.6 percent - Banking sector remained resilient with a minor increase in non-performing loans; adequate capital, liquidity and profitability reported ### Program objectives and strategic priorities (EFF-supported) - Program request: - Cancellation of the Stand-by arrangement (SBA) and a three-year Extended Fund Facility (EFF) with cumulative access of SDR 210.4 million (100 percent of quota) - Program aims: - Promote higher and more inclusive growth while maintaining macroeconomic stability - Strengthen financial stability, reduce external imbalances, enhance fiscal credibility, increase infrastructure investment, and undertake structural reforms - Unlock bilateral and multilateral support; expected total external support over the program period: about $750 million - Medium-term fiscal anchor: - Limit debt to the current level while shifting spending from current toward capital investment to address infrastructure bottlenecks ### Program policies and reforms (fiscal, monetary, financial) - Fiscal consolidation while creating space for investment: - Reduce current spending and increase revenues to create space for public investment - Measures include better management of the wage bill, efficiency gains in current spending, new spending controls on local governments - Increase taxes to offset revenue losses from corporate income tax reform and partly finance additional capital spending - Authorities committed to take additional measures, if needed, to meet the fiscal target - Enhancing the inflation-targeting framework and exchange rate flexibility: - NBG committed to price stability and exchange rate flexibility - NBG target 2017: 4 percent - Continue allowing the exchange rate to adjust with market conditions and aim to build up international reserves - Improve liquidity management, strengthen monetary policy, and improve communication - Strengthening the financial sector: - Reaffirmed independence of the NBG in conducting its financial stability mandate - Introduce limits on loan-to-value and payment-to-income ratios for mortgages, with stricter limits for foreign-currency loans (FSAP recommendation) - Near-term: strengthen safety nets and the resolution framework - Medium-term: enhance the lender of last resort framework - Structural reforms: - Promote job creation, economic diversification, and more inclusive growth - Capital market development and pension reform to mobilize domestic savings and support private sector investment - Education reform to increase productivity and adapt skills to labor market demands - Enhance governance and competition to advance toward emerging market status ### Outlook and key risks - Growth projection: - Real GDP growth projected for 2017: 3.5 percent - Gradual increase to 5.5 percent by 2020 supported by structural reforms and investment - Potential real GDP growth currently estimated at around 4 percent - Inflation projection: - Inflation in 2017 projected to remain above the NBG’s target (4 percent) in 2017 due to lagged effects of exchange rate depreciation, higher commodity prices, and excise tax increases, converging to the NBG target by 2018 - Inflation: 5.5 percent in February (2017); conditional path: converge to 3 percent by end-2018 - External vulnerabilities: - External imbalances remain elevated and reserves below adequate levels - Lari assessed to be somewhat overvalued: EBA-lite suggests overvaluation of 10–12 percent; CA method CA gap -3 percent of GDP and REER overvaluation 11.6 percent; external sustainability approach overvaluation 10.3 percent assuming desired NIIP of -60 percent of GDP; REER method suggests undervaluation of 1 percent - Estimates subject to uncertainties and sensitive to underlying assumptions - Key risks: - Uncertain regional and global economic outlook - Structural weaknesses: narrow production base, high under– and unemployment, skill mismatches - Shock scenarios: a shock to GDP growth or a 30 percent depreciation would increase the public debt-to-GDP ratio between 5 and 10 percentage points; a combined macro-fiscal shock would increase it by almost 25 percentage points; a 30 percent depreciation would increase the external debt–to–GDP ratio by more than 30 percentage points, up to 124 percent of GDP ### Banking sector conditions, oversight, and de-dollarization - Banking sector performance and risks: - Banks continued to report profits and adequate capital and liquidity - Loan dollarization: 65 percent at end-year (box and text show 69.9 percent deposit dollarization and 64.6 percent credit dollarization for 2016) - Non-performing loans (NPLs) increased from 2.7 to 3.5 percent - Factors limiting NPL increases: stringent lending standards, high profitability and proactive restructuring - Concern: an increase in watch loans could indicate limited capacity to absorb further depreciation and result in higher NPLs - Credit to the private sector grew by 12 percent (at constant exchange rates) - Market concentration: two largest banks represent 63 percent of total banking assets - Non-banking sector: 4.5 percent of GDP in size, growing fast and loosely regulated and supervised - Box 1 — Announced De-Dollarization Measures (10-point plan): - A. Increasing long-term lari funding: - Broaden eligible collateral to access NBG liquidity facilities - Introduce Basel III Liquidity Coverage Ratio with preferential treatment of local currency (FSAP recommendation) - Joint strategy for domestic capital markets and develop yield curve (pre-announced auction calendar; establish market dealers) - Pension reform to enhance role of pension funds as institutional investors - B. Reducing FX credit risks: - Loans under GEL100,000 can only be issued in local currency starting January 2017 - NBG program to convert households’ FX mortgages below $40,000 issued before January 1, 2015 - Formalize limits on loan-to-value and payment-to-income ratios - C. Promoting pricing in lari: - Starting July 2017, all prices must be quoted solely in lari - Establish lari escrow accounts for real estate transactions ### Key fiscal, monetary, and external indicators (selected exact values) - Real GDP (annual): - 2012: 6.4 - 2013: 3.4 - 2014: 4.6 - 2015: 2.9 - 2016: 2.7 - 2017 (projected): 3.5 - Nominal GDP: - 2016 (in billions of laris): 33.7 - 2017 (projected, in billions of laris): 36.2 - 2016 (in billions of U.S. dollars): 14.2 - 2017 (projected, in billions of U.S. dollars): 13.7 - GDP per capita (in thousands of U.S. dollars): - 2016: 3.8 - 2017 (projected): 3.7 - GDP deflator, period average: - 2016: 3.2 - 2017 (projected): 4.0 - Investment and saving (percent of GDP) 2016 / 2017: - Gross national saving 2016: 19.4 ; 2017: 20.5 - Investment 2016: 31.8 ; 2017: 33.4 - Public investment 2016: 5.1 ; 2017: 5.8 - Private investment 2016: 26.7 ; 2017: 27.7 - Consolidated government operations (percent of GDP) 2016 / 2017: - Revenue and grants 2016: 28.6 ; 2017: 29.3 - Tax revenue 2016: 26.0 ; 2017: 26.2 - Expenditures 2016: 32.7 ; 2017: 33.4 - Current expenditures 2016: 26.2 ; 2017: 25.3 - Capital spending and net lending 2016: 6.5 ; 2017: 8.0 - Augmented Net lending/borrowing (Program definition) 2014–17: -2.7, -2.7, -3.0, -3.7 - Public debt 2016: 45.5 - Foreign-currency denominated public debt 2016: 35.5 ; 2017: 35.9 - Money and credit (annual percentage change) 2016 / 2017: - Credit to the private sector 2016: 19.6 ; 2017: 10.5 - Credit to the private sector, In constant exchange rate 2016: 12.0 ; 2017: 12.0 - Broad money 2016: 20.4 ; 2017: 10.1 - Deposit dollarization (percent of total) 2016: 69.9 ; 2017: 69.0 - Credit dollarization (percent of total) 2016: 64.6 ; 2017: 61.5 - External sector (percent of GDP): - Current account balance 2016: -12.4 ; 2017 (projected): -12.9 - Gross international reserves (in billions of US$) 2016: 2.8 ; 2017 (projected): 3.1 - Gross external debt 2016: 111.8 percent of GDP ; 2017 (projected): 119.3 percent of GDP - Gross external debt, excl. intercompany loans 2016: 87.8 ; 2017: 91.7 ### Fiscal consolidation, medium-term path, and structural fiscal measures - Program fiscal targets and measures: - Augmented cash fiscal deficit of the general government projected at 3.7 percent of GDP under the program - Authorities plan reduction in current spending of 0.8 percent of GDP and increased capital spending of 0.7 percent of GDP plus lending to SOEs for capital projects of 0.8 percent of GDP - Authorities committed to reducing the augmented fiscal deficit to 2.8 percent of GDP by 2020 - Operating balance improvement: 3.4 percentage points of GDP by 2020 - Capital investment increase (including net budget lending): 2.9 percentage points of GDP by 2020 - Additional fiscal measures needed: 0.4 and 0.5 percent of GDP in 2019 and 2020, respectively - Selected medium-term fiscal measures (In percent of GDP, table-format entries preserved as in source): - Legislated in 2017 Budget: 1.4-0.6 0.8 - Revenue Measures: 0.7-0.6 0.1 - Tobacco excise: 0.6 0.6 - Vehicle and fuel excises: 0.9 0.9 - Advance payments and golden list (**): 0.4-0.4 0.0 - CIT reform: -1.5-0.2-1.7 - Planned Medium-term Measures total identified: 1.0 0.8 0.7 2.6 (cumulative) - Total Identified Measures: 1.4 0.4 0.8 0.7 3.4 (cumulative) - o/w: use to increase capital spending: 0.7 0.7 0.9 0.5 2.7 (cumulative) - Overall balance (GFSM1986 definition): -4.1 -3.8 -3.5 -3.1 - Augmented net lending/borrowing (program definition): -3.7 -3.5 -3.2 -2.8 - Structural and public spending reforms: - Wage bill reform: target additional savings of 0.5 percent of GDP in 2018–20; Remuneration Law for public civil service (structural benchmark, end-December 2017) - Social spending: efficiency measures with savings estimated at 0.2 percent of GDP in 2017 and 0.6 percent of GDP in 2018–20 - Public investment: strengthen Ministry of Finance role in investment prioritization and project appraisal; pilot guidelines for project appraisal to be rolled out - Revenue contingency options: modern property tax, motor vehicle circulation tax, temporary VAT increase - Fiscal risk management and transparency: - 2017 Fiscal Risk Statement (FRS) covers SOEs and PPA liabilities; 2018 FRS to expand coverage to SOEs including quasi-fiscal activities, and PPPs (structural benchmark, end-December 2017) - New PPP law to be submitted to Parliament in 2017 (structural benchmark, end-December 2017); pending approval, authorities will refrain from signing PPPs and PPAs except limited energy-sector cases subject to comprehensive fiscal risk assessment - Program limits Partnership Fund’s new borrowing (performance criterion) and imposes a ceiling on its cash deficit (performance criterion) ### Liquidity management, monetary operations, and technical benchmarks - Liquidity management: - NBG introduced a one-month liquidity facility in December 2016 - Broadened the list of eligible collateral, with haircuts based on risk and liquidity - Memorandum of understanding on information sharing for liquidity forecasting between MoF and NBG (structural benchmark, end-June 2017) - Government to submit legal amendments in 2017 to allow derivatives and repo transactions - Pre-announcement of a multi-year issuance plan for government benchmark bonds (structural benchmark, end-December 2017) - Creation of a framework for primary dealers to foster development of a liquid market - Box 2 — Refinancing loans in Georgia (policy mechanics): - Georgia operates an inflation targeting regime; monetary policy conducted through the policy rate - Refinancing loans improved efficiency of NBG monetary policy and facilitated long-term mortgage lending with adjustable interest rates linked to refinancing loans - Selected yearly changes (million GEL) in refinancing operations presented in the source (e.g., Increase in NBG Refinancing Loans: 931 335 568 8) ### Structural reforms to boost inclusive growth - Four Point Reform Plan focus areas: - Education, roads infrastructure (transit and tourism hub), public administration efficiency, business environment improvements - Investment, trade integration, and PPPs: - Encourage FDI in export-oriented sectors; draft PPP framework to leverage energy sector and roads infrastructure - Capital markets and pension reform: - Publish multi-year government bond issuance calendar to develop benchmark bonds - Georgian Stock Exchange upgrading trading infrastructure with NBG - Pension reform: submit legislation to introduce a second pension pillar (structural benchmark, end-December 2017); pension fund projected to collect GEL200-300 million per year - Education reform: - Set curriculum standards, adopt a new teacher policy framework, introduce vocational training and adult learning - Governance and competition: - Introduce IFRS for corporations, revamp insolvency law, reform land cadaster ### Program modalities, financing, and conditionality (exact numbers) - Arrangement and access: - Three-year EFF arrangement with access of SDR 210.4 million (100 percent of quota, about $285 million) - Overall external financing package estimated at $754 million for the three-year program period (text also references about $750 million) - Reserves projected to accumulate to around 110 percent of the Fund’s ARA metric in 2020, compared to 88 percent in 2016 - Proposed Fund financing intended to cover the residual gap of 26 percent of total financing needs - Program financing table excerpts (Millions of U.S. Dollars): - Financing Gap: 257 222 184 91 (2017 2018 2019 2020) - Identified financing: 257 222 184 91 - IMF: 69 27 34 41 - Prospective purchases: 81 81 81 41 - Repurchases: -12 -54 -47 0 - Official creditors: 188 195 150 50 - World Bank: 100 100 100 50 - EU: 26 45 00 - Others: 62 50 50 0 - Memorandum items: - Gross international reserves: 3,061 3,376 3,799 4,249 - in percent of IMF Composite measure: 92 96 102 109 - EFF in percent of total financing: 27 12 18 45 - Phasing and monitoring: - Disbursements phased uniformly over seven installments starting from Board approval - Monitoring via semi-annual reviews, continuous performance criteria (PCs), an inflation consultation clause, indicative targets, and structural benchmarks - Quantitative PCs include: ceiling on augmented cash deficit of the general government; a floor on net international reserves (NIR); ceilings on the cash deficit and new borrowing of the Partnership Fund; continuous PCs on flow of external debt arrears and on new public guarantees ### Capacity to repay the Fund, safeguards, and program risks - Repayment and debt profile: - Georgia expected to meet obligations to the Fund - Exposure to the Fund will peak at 1.6 percent of GDP in 2020, before declining to 1.3 percent of GDP by 2022 - Debt service to the Fund will average below 1 percent of GIR, about 0.3 of total exports during 2017–22 - Repayment of the EFF arrangement will begin in 2021 and result in averaged debt service obligations of SDR 31.6 million in 2023–28, slightly above 1 percent of GIR - Safeguards and arrears: - Georgia owes external arrears to Kazakhstan and Turkmenistan deemed away under the policy on arrears to official bilateral creditors; Paris Club Agreement considered adequately representative - 2014 safeguard assessment found robust central bank framework; NBG implemented all but one non-priority recommendation - NBG’s 2015 financial statements prepared and audited in accordance with international standards and published - Program risks: - Risks are significant but manageable; sustained weak domestic demand amid fiscal consolidation and subdued global growth could weaken growth and lead to reform fatigue - Fiscal policy calibrated to allow space for productive public investment, but hinges on minimizing fiscal risks - Government readiness to adopt fiscal measures if needed to meet fiscal targets is emphasized ### MEFP commitments, structural benchmarks, and TMU highlights (selected exact items and deadlines) - MEFP financing request: - 36-month EFF in the cumulative amount of SDR 210.4 million (100 percent of quota) - Request to cancel the existing Stand-By Arrangement - Key fiscal commitments and amounts (GEL and percent of GDP): - Fuel excise increase: GEL270 million, 0.7 percent of GDP - Tobacco excise increase: GEL215 million, 0.6 percent of GDP - Gambling fee and e-gambling tax increase: GEL50 million, 0.14 percent of GDP - Vehicle excise increase: GEL45 million, 0.1 percent of GDP - Advance payments and restricting preferences: GEL150 million, 0.4 percent of GDP (one-off) - Reduction of the wage bill: GEL190 million, 0.5 percent of GDP - Cuts in goods and services: GEL50 million, 0.2 percent of GDP - Improved efficiency of public healthcare and targeting: GEL110 million, 0.3 percent of GDP - End of the agro-land program (cumulative): GEL50 million, 0.1 percent of GDP - Selected TMU quantitative program targets and definitions: - Floor on NIR of NBG (End-period stock, in mn US$): 1,210; 1,350 - Ceiling on augmented General Government deficit (in mn lari, cash basis): -330; -1,335 - Ceiling on the accumulation of net domestic expenditure arrears of the General Government (in mn lari): 0; 0 - Ceiling on the accumulation of external debt arrears of the Public Sector (continuous criterion) (in mn US$): 0; 0 - Ceiling on new public guarantees (continuous criterion) (in mn lari): 0; 0 - Ceiling on the cash deficit of the Partnership Fund (in mn lari): 0; 0 - Ceiling on the new borrowing of the Partnership Fund (in mn US$): 20; 20 - Key structural benchmarks and deadlines (examples): - Introduce LCR for commercial banks with preferential treatment of GEL-deposits — End-September 2017 - Increase minimum regulatory capital to GEL 50 million, phased in by 2019 — End-June 2017 - Submit to Parliament legislation establishing deposit insurance as of January 1, 2018 — End-June 2017 - Submit to Parliament amendments to NBG Law to give authority to resolve a bank through temporary administration — End-September 2017 - Publish a multi-year calendar for government benchmark bonds — End-December 2017 - Submit PPP law to Parliament — End-December 2017 - Action plan to address accumulated outstanding VAT refunds — End-September 2017 - Submission of a pension law establishing a 2nd pillar pension system — End-December 2017 - Program exchange rates (Currency/US$) used for monitoring: - SDR: 0.7439 - GEL: 2.6468 - AUD: 0.7227 - CAD: 0.7419 - EUR: 1.0556 ### Staff appraisal and policy recommendations (selected) - Assessment of past policy response: - Initial policy response to the late 2014 external shock was not fully successful; delayed recognition increased fiscal slippages - NBG focused on bringing inflation back to target; exchange rate adjustment acted as a buffer - Program justification: - EFF is appropriate given ambitious structural agenda and time needed to build reserve buffers - Program conditionality provides safeguards and anchors macroeconomic policies - Policy recommendations: - Implement the 2017 budget strictly to reinstate fiscal credibility - Maintain focus on price stability and exchange rate flexibility; limit FX interventions to smoothing volatility and reserve build-up - Strengthen banking regulation and supervision, introduce deposit insurance, raise minimum capital, and enhance resolution and safety nets - Continue de-dollarization measures and develop long-term lari funding and capital markets - Build reserve buffers toward the Fund’s ARA metric and mobilize timely external support from partners - Strengthen fiscal risk management (PPP/PPA/SOE exposures) and expand Fiscal Risk Statement coverage *Source: Georgian authorities; and Fund staff estimates, IMF staff report (March 27, 2017).* ### 2.7 percent, due to a decline in trading partners’ growth since late 2014. Inflation was also ### cr1797 - 2.7 percent, due to a decline in trading partners’ growth since late 2014. Inflation was also ### Recent economic developments and macroeconomic outcomes - Real GDP growth: - 2015: 2.9 percent - 2016: 2.7 percent (supported by consumption demand) - Inflation: - End-year inflation 2016: 1.8 percent (below the 5 percent target) - CPI, Period average 2016: 2.1 - CPI, End-of-period 2016: 1.8 - NBG policy rate reductions in 2016: from 8.0 percent to 6.5 percent; January 2017: raise by 25 basis points - External sector: - Current account deficit 2016: -12.4 percent of GDP (widened slightly due to a worsening trade balance) - Financing: continued to be largely financed by FDI - Gross international reserves 2016: $2.8 billion - Gross external debt 2016: 111.8 percent of GDP (external debt mostly concessional) - Gross external debt, excl. intercompany loans 2016: 87.8 percent of GDP - Lari depreciation vs. USD in 2016: 4 percent (cumulative 27 percent since end-2014) - REER (period average; CPI based, 2010=100) 2016: 107.5 - Fiscal outcomes: - Cash fiscal deficit including net budget lending 2016: 4.1 percent of GDP (above the SBA target of 3.0 percent of GDP) - Overruns in: health (following universal healthcare), defense, tourism, local government (0.9 percent of GDP), and budget lending (0.4 percent of GDP) - Excise and corporate profit taxes: higher-than-envisaged/performed - Banking sector and credit: - Credit grew 12 percent (at constant exchange rate) in 2016 (table shows "In constant exchange rate" 2016: 12.0) - Deposit dollarization 2016: 69.9 percent - Credit dollarization 2016: 64.6 percent - Banking sector remained resilient with a minor increase in non-performing loans; adequate capital, liquidity and profitability reported ### Program objectives and strategic priorities (EFF-supported) - Program request: - Cancellation of the Stand-by arrangement (SBA) and a three-year Extended Fund Facility (EFF) with cumulative access of SDR 210.4 million (100 percent of quota) - Program aims: - Promote higher and more inclusive growth while maintaining macroeconomic stability - Strengthen financial stability, reduce external imbalances, enhance fiscal credibility, increase infrastructure investment, and undertake structural reforms - Unlock bilateral and multilateral support; expected total external support over the program period: about $750 million - Medium-term fiscal anchor: - Limit debt to the current level while shifting spending from current toward capital investment to address infrastructure bottlenecks ### Program policies and reforms - Fiscal consolidation while creating space for investment: - Reduce current spending and increase revenues to create space for public investment - Measures include better management of the wage bill, efficiency gains in current spending, new spending controls on local governments - Increase taxes to offset revenue losses from corporate income tax reform and partly finance additional capital spending - Authorities committed to take additional measures, if needed, to meet the fiscal target - Enhancing the inflation-targeting framework and exchange rate flexibility: - NBG committed to price stability and exchange rate flexibility - Inflation monitored regularly to ensure consistency with NBG medium-term targets (NBG target 2017: 4 percent) - Continue allowing the exchange rate to adjust with market conditions and aim to build up international reserves - Improve liquidity management, strengthen monetary policy, and improve communication - Strengthening the financial sector: - Reaffirmed independence of the NBG in conducting its financial stability mandate - In line with FSAP recommendations, introduce limits on loan-to-value and payment-to-income ratios for mortgages, with stricter limits for foreign-currency loans - Near-term: strengthen safety nets and the resolution framework - Medium-term: enhance the lender of last resort framework - Structural reforms: - Promote job creation, economic diversification, and more inclusive growth - Capital market development and pension reform to mobilize domestic savings and support private sector investment - Education reform to increase productivity and adapt skills to labor market demands - Enhance governance and competition to advance toward emerging market status ### Outlook and risks - Growth projection: - Real GDP growth projected for 2017: 3.5 percent - Inflation projection: - Inflation in 2017 projected to remain above the NBG’s target (4 percent) in 2017 due to lagged effects of exchange rate depreciation, higher commodity prices, and excise tax increases, converging to the NBG target by 2018 - Key risks: - Uncertain regional and global economic outlook - Structural weaknesses: narrow production base, high under– and unemployment, skill mismatches leading to inherently weak external position and slow growth - External imbalances remain elevated and reserves below adequate levels - Exchange rate assessment: - Lari assessed to be somewhat overvalued; EBA-lite approach suggests overvaluation of 10–12 percent - CA method suggests a CA gap of -3 percent of GDP and an REER overvaluation of 11.6 percent - External sustainability approach suggests overvaluation of 10.3 percent assuming a desired NIIP of -60 percent of GDP - REER method suggests an undervaluation of 1 percent - Estimates subject to uncertainties and sensitive to underlying assumptions ### Key fiscal, monetary, and external indicators (selected values) - Real GDP: - 2012: 6.4 - 2013: 3.4 - 2014: 4.6 - 2015: 2.9 - 2016: 2.7 - 2017 (projected): 3.5 - Nominal GDP (in billions of laris): - 2016: 33.7 - 2017 (projected): 36.2 - Nominal GDP (in billions of U.S. dollars): - 2016: 14.2 - 2017 (projected): 13.7 - GDP per capita (in thousands of U.S. dollars): - 2016: 3.8 - 2017 (projected): 3.7 - GDP deflator, period average: - 2016: 3.2 - 2017 (projected): 4.0 - Investment and saving (in percent of GDP) 2016 / 2017: - Gross national saving 2016: 19.4 ; 2017: 20.5 - Investment 2016: 31.8 ; 2017: 33.4 - Public investment 2016: 5.1 ; 2017: 5.8 - Private investment 2016: 26.7 ; 2017: 27.7 - Consolidated government operations (in percent of GDP) 2016 / 2017: - Revenue and grants 2016: 28.6 ; 2017: 29.3 - Tax revenue 2016: 26.0 ; 2017: 26.2 - Expenditures 2016: 32.7 ; 2017: 33.4 - Current expenditures 2016: 26.2 ; 2017: 25.3 - Capital spending and net lending 2016: 6.5 ; 2017: 8.0 - Augmented Net lending/borrowing (Program definition) 2014–17 (last columns): -2.7, -2.7, -3.0, -3.7 (table entries) - Public debt 2016: 45.5 (table shows earlier years and 2016) - Foreign-currency denominated public debt 2016: 35.5 ; 2017: 35.9 - Money and credit (annual percentage change) 2016 / 2017: - Credit to the private sector 2016: 19.6 ; 2017 (table): 10.5 - Credit to the private sector, In constant exchange rate 2016: 12.0 ; 2017: 12.0 - Broad money 2016: 20.4 ; 2017: 10.1 - Deposit dollarization (in percent of total) 2016: 69.9 ; 2017: 69.0 - Credit dollarization (in percent of total) 2016: 64.6 ; 2017: 61.5 - External sector (in percent of GDP; unless otherwise indicated): - Current account balance 2016: -12.4 ; 2017 (projected): -12.9 - Gross international reserves (in billions of US$) 2016: 2.8 ; 2017 (projected): 3.1 - Gross external debt 2016: 111.8 percent of GDP ; 2017 (projected): 119.3 percent of GDP - Gross external debt, excl. intercompany loans 2016: 87.8 ; 2017: 91.7 *Source: Georgian authorities; and Fund staff estimates, IMF staff report (March 27, 2017).* ### 8. The banking sector remains resilient. Banks continued to report profits and adequate ### 8. The banking sector remains resilient. Banks continued to report profits and adequate ### Banking sector: conditions and risks - Banks continued to report profits and adequate capital and liquidity (Figure 4). - Loan dollarization: 65 percent at end-year. - Non-performing loans (NPLs) increased from 2.7 to 3.5 percent. - Factors limiting NPL increases: stringent lending standards, high profitability and proactive restructuring. - Concern: an increase in watch loans could indicate limited capacity to absorb further depreciation and result in higher NPLs. - Credit to the private sector grew by 12 percent (at constant exchange rates). - Market concentration: The two largest banks (Bank of Georgia and TBC Bank) now represent 63 percent of total banking assets after each bought smaller banks. - Non-banking sector: 4.5 percent of GDP in size, growing fast and loosely regulated and supervised. ### Box 1 — Georgia: Announced De-Dollarization Measures A 10-point plan focused on increasing long-term lari funding; reducing FX credit risk; and promoting pricing in lari. A. Increasing long-term lari funding - 1. To facilitate maturity transformation, the NBG will broaden the list of eligible collateral to access NBG liquidity facilities. - 2. The NBG will introduce Basel III Liquidity Coverage Ratio with preferential treatment of local currency (FSAP recommendation). - 3. The joint strategy for developing domestic capital markets aims at promoting long-term corporate financing. - 4. The authorities will develop the yield curve by: a) creating liquid benchmark, with a pre-announced auction calendar; and b) establishing market dealers to promote liquid secondary markets. - 5. The pension reform will enhance the role of pension funds as institutional investors, increasing the demand for long-term lari instruments and help promote access to long-term lari funding. B. Reducing FX credit risks - 6. To limit currency risks for unhedged borrowers, loans under GEL100,000 can only be issued in local currency starting January 2017. - 7. The NBG offers a program to convert households’ FX mortgages below $40,000, issued before January 1, 2015. - 8. The NBG will formalize limits on loan-to -value and payment-to -income ratios to limit FX-induced credit risks (FSAP recommendation). C. Promoting pricing in lari - 9. Starting July 2017, all prices must be quoted solely in lari. - 10. To promote settlements in lari, t he authorities and commercial banks will establish an escrow account for real estate transactions in lari. ### Outlook and risks: growth, inflation, reserves, and external vulnerability - Real GDP growth projections: - 2017: 3.5 percent, supported by consumption and investment. - Gradual increase to 5.5 percent by 2020 supported by structural reforms and investment. - Potential real GDP growth currently estimated at around 4 percent. - Structural reforms projected to add about 1 percentage point to economic growth over the medium term. - Inflation: - 5.5 percent in February (2017). - NBG target: 4 percent in 2017. - Conditional path: inflation projected to decline rapidly and converge to 3 percent target by end-2018. - Current account deficit: projected to improve to 9.2 percent of GDP by 2022. - Financing: FDI will finance 90 percent of the current account deficit, on average. - Gross international reserves: projected to increase, reaching close to 110 percent of the Fund’s ARA metric by 2020. - Debt dynamics and vulnerability: - Under the program scenario, public debt stabilizes at 45 percent of GDP after peaking at around 47 percent in 2019. - Total external debt stabilizes at 92 percent of GDP. - Public debt mostly concessional with long maturities and low effective interest rates. - Shock scenarios: - A shock to GDP growth or a 30 percent depreciation would increase the public debt-to -GDP ratio between 5 and 10 percentage points. - A combined macro-fiscal shock would increase it by almost 25 percentage points. - A 30 percent depreciation would increase the external debt–to–GDP ratio by more than 30 percentage points, up to 124 percent of GDP. ### Program objectives and policies: fiscal consolidation, structural reforms, and financial resilience - Program aims: reduce economic vulnerabilities, support inclusive growth, strengthen policy frameworks, build external buffers, and promote structural reforms to raise productivity and competitiveness. - Financial sector: resilience to be further strengthened through regulatory and supervisory measures and enhanced financial safety nets. - Monitoring: strengthen monitoring of contingent liabilities from PPPs and SOEs. A. Fiscal consolidation while creating space for investment - Program fiscal targets: - Augmented cash fiscal deficit of the general government projected at 3.7 percent of GDP under the program. - Authorities plan reduction in current spending of 0.8 percent of GDP. - Increased capital spending of 0.7 percent of GDP and lending to SOEs for capital projects of 0.8 percent of GDP. - Medium-term fiscal path: - Authorities committed to reducing the augmented fiscal deficit to 2.8 percent of GDP by 2020. - Operating balance improvement: 3.4 percentage points of GDP by 2020. - Capital investment increase (including net budget lending): 2.9 percentage points of GDP by 2020. - Additional fiscal measures needed: 0.4 and 0.5 percent of GDP in 2019 and 2020, respectively. - Medium-term fiscal measures (2017–20) — selected numeric items (In percent of GDP): - Legislated in 2017 Budget: 1.4-0.6 0.8 (table entries shown as in source). - Revenue Measures: 0.7-0.6 0.1. - Tobacco excise: 0.6 0.6. - Vehicle and fuel excises: 0.9 0.9. - Advance payments and golden list (**) : 0.4-0.4 0.0. - CIT reform: -1.5-0.2-1.7. - Planned Medium-term Measures total identified: 1.0 0.8 0.7 2.6 (cumulative). - Total Identified Measures: 1.4 0.4 0.8 0.7 3.4 (cumulative). - o/w: use to increase capital spending: 0.7 0.7 0.9 0.5 2.7 (cumulative). - Overall balance (GFSM1986 definition): -4.1 -3.8 -3.5 -3.1. - Augmented net lending/borrowing (program definition): -3.7 -3.5 -3.2 -2.8. - Structural and public spending reforms: - Wage bill reform: target additional savings of 0.5 percent of GDP in 2018–20; remuneration law for public civil service (structural benchmark, end-December 2017). - Social spending: measures to increase cost efficiency in public healthcare with savings estimated at 0.2 percent of GDP in 2017 and 0.6 percent of GDP in 2018–20. - Public investment: more gradual increase; strengthen Ministry of Finance role in investment prioritization and project appraisal; pilot guidelines for project appraisal to be rolled out. - Revenue contingency options: modern property tax, motor vehicle circulation tax, temporary VAT increase. - Fiscal risk management and transparency: - 2017 Fiscal Risk Statement (FRS) covers SOEs and Power-Purchase Agreement (PPA) liabilities. - 2018 FRS to expand coverage to SOEs including quasi-fiscal activities, and PPPs (structural benchmark, end-December 2017). - New PPP law to be submitted to Parliament in 2017 (structural benchmark, end-December 2017); pending approval, authorities will refrain from signing PPPs and PPAs except limited energy-sector cases subject to comprehensive fiscal risk assessment. - Program limits Partnership Fund’s new borrowing (performance criterion) and imposes a ceiling on its cash deficit (performance criterion). - Staff recommendations: give strong role to Ministry of Finance in value-for-money and budget affordability reviews; ensure competitive tender processes; report PPP liabilities in line with international accounting standards. - Fiscal and budgetary framework strengthening (MEFP, ¶14): - Review fiscal rule’s framework to provide fiscal policy flexibility while ensuring sustainability. - Fiscal transparency reforms recommended: include LEPL revenue and associated expenditure in government finance statistics; transparent classification and reporting of budget lending, equity injections and subsidies to SOEs; improved reporting of tax expenditures; require Supreme Audit Institution to audit government’s annual financial statements according to international standards (INTOSAI). - Authorities to prepare guidelines for approving budget lending operations requiring reasonable expectation of commercial returns (structural benchmark, end-December 2017). - Authorities committed to a comprehensive review of government finance statistics to identify gaps with international statistical standards. - Staff recommended Supreme Audit Institution to do a complete audit of financial statements; authorities argued government accounts should be compliant with IPSAS ahead of such exercise. B. Enhancing the inflation targeting framework and continued exchange rate flexibility - NBG commitments: - Remain committed to containing inflation and to exchange rate flexibility. - Program includes an Inflation Consultation Clause (ICC) to signal commitment to the inflation targeting regime. - Inflation monitored through dual consultation bands around a central point based on the projected 12-month inflation path, consistent with NBG’s inflation targets. - Exchange rate and reserves policy: - Flexible exchange rate regime to continue, limiting interventions to smoothing disorderly exchange rate volatility and/or building up reserves if needed. - Performance criterion on net international reserves; program will seek to build up gross reserves to nearly 110 percent of the IMF composite measure of reserve adequacy for floating exchange rate regimes, warranted due to additional risks from dollarization. *Source: IMF staff report (chapter content).* ### 21. Under the program, the NBG will continue improving liquidity management and ### 21. Under the program, the NBG will continue improving liquidity management and provision ### Liquidity management and monetary operations - The NBG introduced a one-month liquidity facility in December 2016. - To address increasing demand for liquidity, the NBG broadened the list of eligible collateral, with haircuts based on the risk and liquidity profile, to enhance confidence and facilitate maturity transformation. - Structural benchmarks and legal reforms: - Memorandum of understanding on information sharing for liquidity forecasting between the Ministry of Finance and the NBG (structural benchmark, end-June 2017). - Government to submit to Parliament legal amendments in 2017 to allow for derivatives and repo transactions. - Pre-announcement of a multi-year issuance plan for government benchmark bonds (structural benchmark, end-December 2017). - Creation of a framework for primary dealers to foster development of a liquid market for government securities and increase availability of high quality collateral for refinancing operations. - The NBG will issue guidelines for monetary policy operations to strengthen communication; NBG already started quarterly press conferences after Monetary Policy Committee meetings in April 2016 and now publishes the forecast for the policy rate path in its monetary policy report. ### Box 2 — Refinancing loans in Georgia (monetary policy mechanics and recent developments) - Georgia operates an inflation targeting regime; monetary policy is conducted through the policy rate. - Commercial banks obtain base money via NBG refinancing loans (open market operations) or standing facilities in exceptional cases. - Factors determining nominal volumes of refinancing loans: 1. currency in circulation; 2. changes in commercial banks’ reserves at the NBG; 3. changes in the balance on the government’s account in the NBG; 4. NBG issuing or redeeming Certificates of Deposits (CDs); 5. NBG foreign exchange auctions (FX purchase increases base money; FX sale reduces base money). - Interbank rate behavior: - During 2015, the interbank rate was above the policy rate. - Since then (2016), it has been close to the policy rate, implying refinancing loans were in line with demand in 2016. - Policy outcome: - Refinancing loans improved efficiency of NBG monetary policy and facilitated long-term mortgage lending with adjustable interest rates linked to refinancing loans. - Selected yearly changes (million GEL) as presented: - Increase in NBG Refinancing Loans: 931 335 568 8 - 1. Increase in Currency in Circulation: 433 111 424 96 - 2. Increase in Required and Excess Reserves: 111 209 -258 -21 - 3. Increase in Gov't Deposits at NBG: -113 -98 13 13 - 5. Issuance of NBG CDs: 122 -184 -147 -156 - 6. FX Purchase/Sale by NBG: -544 186 637 56 - Interest rate chart notes (Percent): policy rate, overnight deposit rate (upper limit), overnight deposit rate (lower limit), interbank rate (7 day). ### Strengthening financial sector policies and supervision - Independence and mandate: - Program supports efforts to strengthen NBG independence for financial stability; Parliament approved amendments invalidating law establishing a financial supervision agency outside the central bank (prior action). - Prudential and macroprudential measures (structural benchmarks and timelines): - Introducing limits on loan-to-value and payment-to-income ratios for mortgages, with more stringent limits on foreign currency loans (in line with FSAP recommendations). - Introducing liquidity coverage ratio limits with preferential treatment of domestic currency liabilities (structural benchmark, end-September 2017). - Differentiated reserve requirement for domestic and foreign currency deposits and higher risk weights on foreign currency loans in capital adequacy calculation. - Minimum capital requirements to be increased gradually to GEL50 million by 2019 (structural benchmark, end-June 2017) from the current GEL12 million. - Additional capital requirements for systemically important banks (structural benchmark, end-December 2017). - Introduction of Basel Pillar III disclosure requirements. - Legislation to give NBG oversight power for credit information bureaus (structural benchmark, December 2017). - With TA support, publish a self-standing financial stability report with forward-looking analysis. - Safety nets and resolution framework: - Legislation to introduce a deposit guarantee scheme (structural benchmark end-June 2017) to meet a requirement under the Association Agreement with the EU. - Legislation empowering NBG to appoint a temporary administration for a bank at early stages of distress (structural benchmark, end-September 2017). - Strengthen NBG capacity to act as lender of last resort and strengthen the resolution framework to minimize risks to financial stability and public sector exposure. - Non-bank oversight: - NBG to expand oversight over non-deposit taking institutions; recent ban on extending loans in foreign currency below the equivalent of GEL100,000 to limit risks for small non-bank credit institutions. - Collateral and capital markets: - NBG decision to broaden eligible collateral for liquidity facilities to include corporate bonds, increasing demand for corporate securities. ### Structural reforms to boost inclusive growth - Four Point Reform Plan focus areas: education, roads infrastructure (transit and tourism hub), public administration efficiency, business environment improvements to boost private sector. - Investment, trade integration, and PPPs: - Encourage FDI in export-oriented sectors to improve competitiveness and reduce external vulnerabilities. - Draft PPP framework to leverage energy sector and roads infrastructure. - Capital markets and pension reform: - Publication of multi-year government bond issuance calendar to develop benchmark bonds. - Georgian Stock Exchange upgrading trading infrastructure in cooperation with NBG. - Taxation changes for financial instruments with TA support to ensure level-playing field. - Authorities plan to introduce derivatives with EBRD assistance. - Pension reform: Government committed to submit legislation to introduce a second pension pillar (structural benchmark, end-December 2017). - Pension fund projected to collect GEL200-300 million per year, creating demand for long-term lari instruments. - Staff emphasized clarity on investment strategy and accountability of the pension fund. - Education reform: - Authorities plan reforms with World Bank support: set curriculum standards, adopt a new teacher policy framework, introduce vocational training and adult learning. - Governance and competition: - Plans to introduce IFRS for corporations, revamp insolvency law, reform land cadaster. ### Program modalities, financing, and conditionality - Arrangement and access: - Three-year EFF arrangement with access of SDR 210.4 million (100 percent of quota, about $285 million). - Overall external financing package estimated at $754 million for the three-year program period. - Reserves projected to accumulate to around 110 percent of the IMF ARA metric in 2020, compared to 88 percent in 2016. - Proposed Fund financing intended to cover the residual gap of 26 percent of total financing needs. - Program financing table excerpts (Millions of U.S. Dollars): - Financing Gap: 257 222 184 91 (2017 2018 2019 2020) - Identified financing: 257 222 184 91 - IMF: 69 27 34 41 - Prospective purchases: 81 81 81 41 - Repurchases: -12 -54 -47 0 - Official creditors: 188 195 150 50 - World Bank: 100 100 100 50 - EU: 26 45 00 - Others: 62 50 50 0 - Memorandum items: - Gross international reserves: 3,061 3,376 3,799 4,249 - in percent of IMF Composite measure: 92 96 102 109 - EFF in percent of total financing: 27 12 18 45 - Phasing and monitoring: - Disbursements phased uniformly over seven installments starting from Board approval. - Monitoring via semi-annual reviews, continuous performance criteria (PCs), an inflation consultation clause, indicative targets, and structural benchmarks. - Quantitative PCs include: ceiling on augmented cash deficit of the general government; a floor on net international reserves (NIR); ceilings on the cash deficit and new borrowing of the Partnership Fund; continuous PCs on flow of external debt arrears and on new public guarantees. - Indicative ceiling on current primary spending and an indicative target on accumulation of general government domestic expenditure arrears. - Monetary conditionality embedded in an inflation consultation clause set symmetrically around projected 12-month percentage change in headline inflation, consistent with the NBG’s inflation target. - Short-term structural benchmarks to strengthen financial regulatory and supervisory frameworks, crisis management frameworks, introduce PPP framework and guidelines for budget lending, and initiate pension and capital market reforms. ### Capacity to repay the Fund and program risks - Repayment and debt profile: - Georgia expected to meet obligations to the Fund. - Exposure to the Fund will peak at 1.6 percent of GDP in 2020, before declining to 1.3 percent of GDP by 2022. - Debt service to the Fund will average below 1 percent of GIR, about 0.3 of total exports during 2017–22. - Repayment of the EFF arrangement will begin in 2021 and result in averaged debt service obligations of SDR 31.6 million in 2023–28, slightly above 1 percent of GIR. - Risks: - Risks are significant but manageable. - Sustained weak domestic demand amid fiscal consolidation and subdued global growth could weaken growth and lead to reform fatigue. - Fiscal policy calibrated to allow space for productive public investment, but hinges on minimizing fiscal risks. - Government readiness to adopt fiscal measures if needed to meet fiscal targets (MEFP, ¶8). - Arrears and safeguards: - Georgia owes external arrears to Kazakhstan and Turkmenistan deemed away under the policy on arrears to official bilateral creditors; Paris Club Agreement considered adequately representative. - 2014 safeguard assessment found robust central bank framework; NBG implemented all but one non-priority recommendation (incorporating specific provisions on the Audit Committee and Chief Internal Auditor to be addressed in the next law amendment). - NBG’s 2015 financial statements prepared and audited in accordance with international standards and published on the bank’s website. - Monitoring of safeguards developments at the NBG will continue under the program. ### Staff appraisal (selected findings) - Initial policy response to the late 2014 external shock was not fully successful; government was late in recognizing impact, which delayed policy response and resulted in fiscal slippages. - NBG focused on bringing inflation back to target; exchange rate adjustment acted as a buffer. - External shock increased public and external vulnerabilities and revealed structural weaknesses: likely lower potential output growth, high unemployment and underemployment, narrow production base limiting gains from European market access. - New government formulated a coherent plan to ensure macro and financial stability and raise inclusive growth; initial steps include adopting a budget with tax increases and cuts in current expenditure, reversing the law establishing a financial supervisory agency outside the NBG, and drafting a law on PPPs to limit contingent liabilities. *International Monetary Fund staff summary of program measures and assessments as presented in the source content.* ### 41. The 2017 budget is a credible start to fiscal consolidation, and should be implemented ### 41. The 2017 budget is a credible start to fiscal consolidation, and should be implemented ### Fiscal consolidation and 2017 budget measures - The 2017 budget is described as a credible start to fiscal consolidation and should be implemented strictly to reinstate fiscal credibility. - Measures under the 2017 budget: - Provide a welcome shift in public spending toward investment. - Will reverse the upward trend in current spending of past years. - Revenue measures will help offset losses associated with changes in the corporate income tax and finance about half of the increase in public investment, with the rest being financed by reduced current spending. - Savings in administrative costs are supported by measures limiting budget allocation changes and overruns by local government. - Caveat: - Given the risks associated with implementing changes in the composition of revenues and spending, additional measures may be needed to deliver the fiscal target. ### Medium-term fiscal strategy and institutional reforms - Medium-term fiscal consolidation will require institutional fiscal reforms. - Program support and financing: - The program supports the increase in public investment—predominantly financed on a concessional basis by international financial institutions (IFIs). - Additional deficit-reducing measures will be needed starting in 2019. - Preparatory actions the government needs to start: - Credible and long-lasting policies reducing the government’s wage bill (civil service reform). - Further enhancing the efficiency of the public administration. - Improving targeting of social programs. - Reducing subsidies and equity injections to SOEs over time. - Revenue-side guidance: - Revenue measures may also be necessary and should be aimed toward non-distortionary taxes. - Institutional note: - The authorities’ commitment to review the fiscal rule is welcome. ### Fiscal risks and contingent liabilities - Fiscal risks need to be better contained. - Areas of concern: - Contingent liabilities through PPPs, PPAs, and SOEs have been rising and are a source of concern. - The stock of unpaid VAT refunds needs to be addressed with FAD TA support. - Institutional and legal framework needs: - A framework consistent with best practices is needed for budget lending operations. - The authorities’ commitments to adopt a PPP law and to continue expanding the annual FRS are welcome. - Strengthening the role of the MOF in public investment and PPP management is crucial when scaling up investment. - Specific recommendation: - The authorities should limit and closely monitor the Partnership Fund’s balance sheet. ### Monetary policy stance and framework - Monetary policy should continue to focus on price stability, supported by the flexible exchange rate and efforts to strengthen the transmission mechanism. - Assessment: - The NBG’s monetary policy stance is appropriate. - The inflation targeting framework, combined with the floating exchange rate regime, has served Georgia well. - Foreign exchange intervention: - Foreign exchange intervention need to continue being limited to smoothing excessive exchange rate volatility and, if needed, to build up international reserves. - De-dollarization and liquidity measures: - The de-dollarization measures—prepared jointly by the Government and the NBG—will help strengthen the monetary policy transmission mechanism and reduce financial sector vulnerabilities. - Improvements in lari liquidity facilities, together with NBG’s plans to broaden the collateral pool and improve transparency and communication, will improve further the IT framework. ### Financial sector regulation, supervision, and safety nets - The program will help strengthen banking regulation and supervision, financial safety nets, and the bank resolution framework. - Institutional stance: - Maintaining financial supervision under the NBG mandate is welcome. - NBG commitments and reforms: - Introduce macro-prudential limits on mortgages. - Raise banks’ minimum capital requirement. - Introduce capital buffers for systemically important banks. - Gain oversight of credit information bureaus. - Introduce Basel Pillar III disclosure requirements. - Liquidity and resilience measures: - The introduction of liquidity coverage ratios in 2017 will help strengthen banking sector resilience against liquidity risks. - Introducing deposit insurance and legislative changes to define specific rules for banks’ temporary administration regimes will increase financial sector resilience to shocks. - Oversight and resolution framework: - The program will support the authorities’ efforts to expand NBG’s oversight to nonbanking institutions and develop the banking resolution framework, ensuring that the NBG has sufficient authority to play its role as a lender of last resort. ### Structural reforms and growth inclusivity (Four Point Reform Plan) - The authorities’ broad structural reform agenda (the Four Point Reform Plan) will help support more inclusive growth. - Key elements: - Strengthening tax administration and fiscal risk management. - A funded pension system to support fiscal sustainability and develop domestic capital markets. - Deposit insurance to enhance confidence in the banking system and promote savings. - Further trade integration initiatives to help attract investment. - Human capital and education: - Infrastructure development should be complemented with investment in human capital. - Education reform requires: - Increasing the quality of education. - Revamping education tools and career advancement. - Introducing effective vocational training and adult learning. *IMF staff assessment as presented in the chapter "The 2017 budget is a credible start to fiscal consolidation, and should be implemented".* ### 47. Staff supports the authorities request for the approval of the 3-year Extended ### cr1797 - 47. Staff supports the authorities request for the approval of the 3-year Extended ### Program approval and rationale - Staff supports the authorities’ request for: - Approval of the 3-year Extended Arrangement under the Extended Fund Facility (EFF). - Cancellation of the SBA arrangement. - Authorities are united around a policy agenda centered on inclusive growth. - The program will provide a strong policy anchor for appropriate macroeconomic policies and structural reforms, which has gained momentum following Parliamentary elections. - The implementation of the authorities’ policies and reforms requires timely and continued support from the international community. - Given an ambitious structural reform agenda and time needed to build up reserve buffers to protect against external shocks, staff views that the Extended Fund Facility is an appropriate arrangement. - While risks to the program are significant, they are considered manageable as the authorities’ ownership and the proposed conditionality under the program mitigates those risks and provide safeguards. ### Real economy and inflation (selected findings and projections) - Real GDP growth (annual): - 2014: 4.6 - 2015: 2.9 - 2016: 2.7 - 2017 (Proj.): 3.5 - 2018 (Proj.): 4.0 - 2019 (Proj.): 4.5 - 2020 (Proj.): 5.0 - 2021 (Proj.): 5.5 - 2022 (Proj.): 5.5 - Inflation and prices: - GDP deflator, period average: 2016: 3.2; 2017 (Proj.): 4.0; 2018–2022 generally 3.0. - CPI, Period average: 2016: 2.1; 2017 (Proj.): 5.7; 2018–2022 generally 2.4–3.0. - CPI, End-of-period: 2016: 1.8; 2017 (Proj.): 5.4; 2018–2022 generally 3.0. - Growth drivers noted: growth in the period is driven mostly by consumption and investment; consumer confidence improving; interest rates have fallen. ### External sector: balances, reserves, and vulnerabilities - Current account balance (percent of GDP): - 2014: -10.6 - 2015: -12.0 - 2016: -12.4 - 2017 (Proj.): -12.9 - 2018 (Proj.): -12.5 - 2019 (Proj.): -11.5 - 2020 (Proj.): -11.0 - 2021 (Proj.): -10.3 - 2022 (Proj.): -9.2 - Trade balance (percent of GDP) 2016: -44.4; projections improve to -27.9 by 2022. - Gross international reserves (in billions of US$): - 2014: 2.7 - 2015: 2.5 - 2016: 2.8 - 2017 (Proj.): 3.1 - 2018 (Proj.): 3.4 - 2019 (Proj.): 3.8 - 2020 (Proj.): 4.2 - 2021 (Proj.): 4.9 - 2022 (Proj.): 5.6 - Reserve adequacy: - In percent of IMF Composite measure (floating): 2016: 87.6; 2017 (Proj.): 92.5; rises to 125.1 by 2022. - Reserve coverage remained short of the Fund's ARA metric in 2016. - Financing of the current account: - The current account deficit remains mostly financed by FDI (financial account and direct investment figures show strong FDI financing). - Exchange rate and market intervention: - The lari has been volatile and recently depreciated, increasing external vulnerabilities. - The NBG smoothed volatility on the FX market by both buying and selling reserves; interventions and reserve sales/purchases recorded (chart data). ### Fiscal sector: balances, spending, and debt - Consolidated government operations (percent of GDP and GEL amounts): - Revenues and grants around 28.0 percent of GDP in 2014–2017 (28.0 in 2014; 28.1 in 2015; 28.6 in 2016; 29.3 in 2017 Proj.). - Expenditures (percent of GDP): 2014: 31.0; 2015: 31.9; 2016: 32.7; 2017 (Proj.): 33.4. - Current expenditures rising, driven mostly by social spending (health, pensions, and education). - Capital spending and net lending projected to increase: capital spending (percent of GDP) 2016: 6.5; 2017 (Proj.): 8.0; 2018–2022 remain in the 8.1–9.6 range. - Overall balance (percent of GDP): - 2014: -2.9 - 2015: -3.8 - 2016: -4.1 - 2017 (Proj.): -4.1 - 2018 (Proj.): -3.8 - 2019 (Proj.): -3.5 - 2020 (Proj.): -3.1 - 2021 (Proj.): -2.8 - 2022 (Proj.): -2.5 - Public debt (percent of GDP): - 2014: 35.6 - 2015: 41.4 - 2016: 44.9 - 2017 (Proj.): 45.5 - 2018 (Proj.): 46.7 - 2019 (Proj.): 47.2 - 2020 (Proj.): 46.9 - 2021 (Proj.): 46.2 - 2022 (Proj.): 45.1 - Increase in public debt largely attributed to exchange rate depreciation. ### Financial sector and banking system - Credit to private sector recovering; private credit growth (annual percentage change): - 2014: 22.1 - 2015: 19.6 - 2016: 10.5 - 2017 (Proj.): 11.2 - Later projections generally around 10.6–11.0. - Deposit and credit dollarization: - Deposit dollarization (percent of total): 2016: 69.9; projections decline to 65.2 by 2022. - Credit dollarization (percent of total): 2016: 64.6; projections near 56.0 by 2022. - Despite high credit dollarization, exchange rate depreciation has not resulted in higher NPLs in the observed period. - Banking sector indicators: - Profitability remains high (ROA/ROE charts). - Banks are liquid and well capitalized (liquidity and capital ratios shown). ### Debt sustainability and external vulnerability analysis - Public debt DSA (Table 11 highlights): - Nominal gross public debt: 2016: 44.9 percent of GDP; projections peak around 47.2–46.9 in 2018–2020 and moderate thereafter. - Primary balance projections: 2017: -2.7; 2018: -2.5; 2019: -2.1; 2020: -1.7; 2021: -1.5; 2022: -1.2 (percent of GDP). - Effective interest rate projections around 3.3–2.7 (percent). - IMF staff notes identified debt-creating flows and automatic debt dynamics; residuals include asset changes and other factors. - External debt and vulnerabilities (Table 12 and Figures): - External debt (excluding intercompany loans) 2016: 87.8 percent of GDP; projections remain elevated (e.g., 2017: 91.7; 2018: 90.4; 2019: 91.1; 2022: 92.6). - External debt-to-exports ratio high: 2016: 199.4 percent; projections remain high through 2022. - Gross international reserves in months of next year's imports of goods and services: 2016: 2.9 months; projected to rise to 4.8 months by 2022. - Gross external financing needs (in percent of GDP) elevated in projection years (Table 12 and Table 8). - DSA scenario notes: - Baseline, historical, and alternative scenarios (constant primary balance) are presented with associated debt trajectories and stress-test bound charts. - Staff highlights that reserve buffers need to be built up to protect against external shocks. ### Program modalities, financing, and review schedule (selected numbers) - Proposed use of Fund resources and financing needs (Table 8 / Table 2): - Total financing requirement (2017): 2,882 (millions of US$) - Total financing sources (2017): 2,929 (millions of US$) - Financing gap / official financing needs small in projected years (e.g., total financing needs 257 in 2017–22 memorandum). - Indicators of Fund credit and proposed EFF purchases (Tables 9–10): - Proposed EFF amount (SDR): Total available 210.4 (100 percent of quota). - Proposed prospective purchases under the EFF include scheduled reviews with available purchases of 30 SDR million (14.3 percent of quota) at each review date (specific dates and amounts listed in the schedule). ### Policy implications and recommendations implicit in staff assessment - Maintain strong ownership of reform program and follow-through on proposed conditionality to mitigate program risks. - Build reserve buffers over time to reduce external vulnerability; strengthen reserve coverage toward the Fund’s ARA metric. - Continue appropriate macroeconomic policies anchored by the EFF while implementing an ambitious structural reform agenda to support inclusive growth. - Mobilize timely and continued external support from international partners to finance the authorities’ policy agenda and reserve accumulation. *Source: IMF staff report excerpt (cr1797 - 47).* ### Annex I. Georgia: Unlocking Growth Potential ### Annex I. Georgia: Unlocking Growth Potential ### Overview and macro-structural context - Georgia is a small open economy with limited domestic market size that needs to integrate in the global economy to fully unlock its growth potential. - High rural poverty and high unemployment persist despite improvements in institutions and location advantages. - Authorities’ reform agenda aims to address economic bottlenecks that prevent Georgia from fully reaping its growth potential. ### Potential growth and structural weaknesses - Estimates show potential growth until 2012 was around 6 percent, driven by capital accumulation and TFP growth and an improved business and regulatory environment. - As the growth dividend from reforms reached decreasing returns, productivity declined, gradually reducing potential growth to 4 percent by 2015. - Elements suggesting large untapped potential: - Scope for increasing factors’ productivity because: (i) the production and export base is narrow; (ii) unemployment is high and employment is concentrated in low-productivity sectors; and (iii) business environment can be further improved. - Human capital can be increased to improve labor market outcomes. - Physical capital can be increased to exploit Georgia’s comparative advantage as a platform for markets and as a tourist destination. ### Structure of production and exports - Tradable products share of GDP: increased from 53 percent in 2004 to 55 percent in 2015. - Among tradable sectors, manufacturing and services (mostly financial and communications) each increased their shares in GDP from 9–10 percent in 2004 to 13 percent in 2015. - Agriculture weight in GDP: declined from 13 percent in 2004 to 8 percent in 2015. - Exports concentrated in a few products (metals, wine, mineral water and nuts) and broadly stable over the past 5 years. - Opportunities for export diversification: - Diversify agricultural exports given biodiversity. - Access new large markets (EU or China) could increase market penetration, but quality and standards need improvement (for example, moving toward EU regulations). ### Labor market, human capital, and business environment - Employment concentration and productivity: - About 45 percent of the employed are engaged in agriculture (including subsistence agriculture). - The agricultural sector accounts for less than 10 percent of total value added. - Low productivity reflects fragmented land ownership, poor rural infrastructure (irrigation and drainage), and lack of knowledge, technology, and investments. - Education and skills: - Enrolment in universities: less than 30 percent of Georgian students go on to university-level education, compared to more than 60 percent in Central and Eastern Europe and 70 percent in Western Europe. - PISA-based education quality is low compared with other countries in the region and countries with similar development. - Vocational training needs strengthening; skill mismatches contribute to unemployment and firms’ complaints about lack of technical specialists. - Business environment and innovation: - Doing Business indicators improved from 112th (out of 175 countries) in 2006 to 16th (out of 185 countries) in 2017. - Global Competitiveness Index (2016): ranked Georgia 123rd in capacity for innovation and 112th in business sophistication (out of 140 countries). - Spending on research and development is low and access to technology is limited. - Example: in 2016 about 95 percent of enterprises reported having internet connection, but only 9.5 percent of them reported receiving orders via internet. - SMEs lack business and financial skills (accounting standards, knowledge of regulations, procedures, markets, products), and stronger protection of property rights, modern bankruptcy law, and dispute-resolution mechanisms are needed. ### Infrastructure, transit, and tourism constraints - Transport and logistics: - Transport services accounted for about 7 percent of GDP in 2015 and their shares have remained broadly stable over the past decade. - Despite investments in roads and railways, infrastructure quality limits growth in the sector; current capacity unable to handle more traffic. - Cost of shipping and logistical services is not competitive and Georgia lacks logistical centers meeting modern requirements. - Tourism performance: - Tourism arrivals increased by 10 times over the past decade. - Share of tourism in GDP increased from 4 percent in 2005 to 6 percent in 2015. - Tourism receipts in 2015 reached 2 billion dollars (or 14 percent of GDP). - Share of tourism-related exports in services exports grew from 34 percent in 2005 to 65 percent in 2016 (based on 2016Q3). - Duration of stay of visitors is still short (slightly more than 2 nights in 2016), and average spending by visitors in Georgia is between 3 to 4 times lower than that of tourists in Turkey or in the Euro area. ### FDI, domestic savings, and financing capital spending - FDI patterns: - Over the past five years, FDI have been concentrated in transport, communication, energy, other services, construction and real estate. - Manufacturing and agricultural sectors received relatively small shares of total FDI, resulting in weak correlation between exports and FDI inflows. - Ensuring FDI inflows to sectors with high export potential will be crucial to expand exports. - Domestic savings and capital markets: - Domestic savings are low and need to be increased. - Low savings reflect both low living standards and lack of investment vehicles. - Corporates finance investments through bank loans or retained earnings; SMEs cite lack of access to capital as a major obstacle. - Reforming capital markets and introducing a mandatory pension scheme can create new venues for financing long-term investments. ### Authorities’ reform agenda and policy measures - Key reform areas and measures the authorities are undertaking: - Agriculture and property rights: - Reform land cadaster to facilitate transactions and secure property rights to improve agricultural productivity. - Business environment and firm support: - Set up a Business House to provide public services to enterprises. - Introduce IFRS for corporations. - Reform insolvency law to ensure adequate restructuring framework for viable businesses. - Trade and market access: - Deepen trade relations with other countries to broaden export markets. - Education and human capital: - Comprehensive education reform to set curriculum standards, introduce a new framework for teachers, strengthen vocational training, and support adult learning. - Infrastructure and connectivity: - Scale up infrastructure spending. - Aim to complete the East-West highway and the South-North corridor by 2020. - Build ports, airports, and railways to transform Georgia into a transport and logistics hub connecting Europe with Asia. - Macroeconomic policy stance: - Authorities commit to preserve macroeconomic and financial stability as prerequisites for sustainable economic growth. *Source: Annex I. Georgia: Unlocking Growth Potential (IMF country report content).* ### 4. The enclosed Memorandum of Economic and Financial Policies (MEFP) and the Technical ### Attachment I. Memorandum of Economic and Financial Policies (MEFP) ### IMF financing request and program scope - Government requests a 36-month Extended Fund Facility in the cumulative amount of SDR 210.4 million (100 percent of quota). - Request to cancel the existing Stand-By Arrangement. - Government authorizes IMF to publish this letter, the attached MEFP and TMU, and the related staff report; documents to be posted on official Georgian government websites after IMF Board approval. - Authorities will consult with the IMF on adoption of measures and on revisions to MEFP policies; will provide IMF staff with data and information necessary for monitoring the program. ### Program purpose and strategic policy anchors - Program supports reform agenda based on the Government’s Four Point Plan and the Medium-Term Expenditure Framework (2017–20), and NBG’s policies and reform plans. - Four Point Plan strategic directions: - Education reform: supporting skills development to bridge skills demand and supply. - Infrastructure development: increase regional connectivity; core road infrastructure including East-West highway, two south-north corridors in Tbilisi and Kutaisi; road connecting ports Poti and Batumi. - Governance reforms: increase public participation and improve one-stop shop delivery of government services. - Economic reforms: promote job creation by improving business and investment environment. ### Macroeconomic framework and projections - Program macroeconomic scenario: - Expect economic growth to pick up in 2017 and be higher than in main trading partners; driven by higher investment and consumption and a recovery in exports. - Government believes 4 percent economic growth is achievable in 2017; program uses cautious assumption of 3.5 percent real GDP growth in 2017. - Real GDP growth projected to gradually accelerate over the medium term due to higher investment, structural reforms, and improved external environment. - Inflation: - Headline CPI inflation projected to converge to the NBG’s 3 percent target by 2018. - NBG’s latest projections: inflation will remain within the bands of the inflation consultation clause. - External sector: - Current account deficit expected to adjust 1.6 percentage points of GDP over the medium term to 11 percent of GDP by 2020. - External financing to rely mostly on FDI. - Vulnerabilities and buffers: - Program will reduce vulnerabilities and improve external competitiveness through structural reforms, EU-Georgia Association Agreement implementation, and free trade agreements (including with China). - First line of defense: well-capitalized and liquid banking system. - Fund arrangement would provide additional buffer to cope with negative shocks. ### Fiscal policy objectives and targets - Medium-term fiscal goals: - Gradually reduce the augmented cash deficit of the general government (TMU definition) to 2.8 percent of GDP by 2020. - Maintain public debt around 45 percent of GDP. - Reduce primary current spending (excluding budget lending activities) from 25 percent of GDP in 2016 to 21.4 percent of GDP by 2020. - 2017 budget commitments and performance criteria/targets: - Augmented cash deficit of the general government in the 2017 budget: 3.7 percent of GDP; keep it below GEL1,335 million (performance criterion). - Total primary current expenses of the general government: strive to keep below GEL8,685 million (indicative target). - Increase net acquisition of nonfinancial assets and net lending to GEL2755 million. - Revenue-enhancing measures (amounts and percent of GDP): - Fuel excise increase: GEL270 million, 0.7 percent of GDP. - Tobacco excise increase: GEL215 million, 0.6 percent of GDP. - Gambling fee and e-gambling tax increase: GEL50 million, 0.14 percent of GDP. - Vehicle excise increase: GEL45 million, 0.1 percent of GDP. - Taxation of advance payments and restricting preferences to tax payment due dates (effective July 2017): GEL150 million, 0.4 percent of GDP (one-off measures). - Expenditure-reducing measures (amounts and percent of GDP): - Reduction of the wage bill at central and local government levels: GEL190 million, 0.5 percent of GDP. - Cuts in goods and services: GEL50 million, 0.2 percent of GDP. - Improved efficiency of public healthcare provision and targeting of social programs in municipalities: GEL110 million, 0.3 percent of GDP. - End of the agro-land program (cumulative): GEL50 million, 0.1 percent of GDP. - Contingency and arrears management: - Prepare contingency measures if needed to keep augmented deficit below program ceiling in 2017. - Will not accumulate general government external debt payment arrears outside those under negotiation (performance criterion) or net domestic expenditure arrears (indicative target). - If revenues fall short, consider additional administrative spending containment (including local governments) and limit net lending; if revenues exceed projections, gains could be used for priority growth-enhancing infrastructure projects (in consultation with the Fund). ### Fiscal risk management and constraints - Commitments to reduce fiscal risks: - Refrain from initiating any PPP or PPA agreements until PPP law and institutional framework are in place. - Will not issue new public guarantees (performance criterion) or comfort letters. - Reassess and implement additional fiscal adjustment if needed based on fiscal risk profile. - Partnership Fund constraints: - Partnership Fund to pursue only commercial objectives (minority equity or loan co-financing), will not run a cash deficit (performance criterion), or issue guarantees. - Limit borrowing of the Partnership Fund to $20 million in 2017 (performance criterion). - Rules for partial PPAs under negotiation (exception for current fall-winter power deficit): - Guaranteed purchase period shall not be more than 8 months in each year. - Guaranteed purchase tariff shall not be more than US 6c kWh. - Cumulative installed capacity of these projects under negotiations will not exceed MW500. - Two PPAs under negotiation (Namakhavani HPP Cascade Project and Koromkheti Hydro Project) with cumulative capacity of MW600: allowed to proceed only after conditions including thorough fiscal risk analysis in consultation with World Bank energy expert and IMF, updated gross exposure analysis, net risk exposure scenario analysis, and quantified description of other risk-sharing contractual obligations. ### Capital spending and medium-term consolidation - Commitment to increase capital spending while achieving medium-term fiscal consolidation. - Prepare 2018 budget consistent with the program (structural benchmark, December 2017). - Continue rationalizing current spending via: - Improving public administration efficiency, containing wage bill and administrative expenses. - Improving targeting of subsidies and social assistance programs. - Reducing transfers and privatizing loss-making SOEs. - Broadening use of program budgeting. - Protection of vulnerable populations: existing social safety net to be maintained. - Identified medium-term revenue measures: - Further increases in cigarette excises in 2018–20: 0.3 percent of GDP annually. - Do not plan to extend dividend distribution model to financial institutions and insurance companies in 2019; this would limit revenue loss (up to 0.5 percent of GDP). - Additional contingency measures on the revenue side to be identified if needed within fiscal framework. ### Structural fiscal policies and public financial management reforms - Revenue administration strengthening (Georgia Revenue Services, GRS): - IMF TADAT assessment (mid-2016) found sound tax administration but weaknesses: low filing compliance rates, inadequate follow-up for non-filers, gaps in data sources for risk analysis, weaknesses in operational planning and performance measurement, lack of effective management information system. - In consultation with IMF, developed strategic plan for 2017–2020 to be implemented with 3-year IMF technical assistance and deployment of resident revenue administration advisor. - Initial focus steps: - Improve filing compliance: develop a filing compliance program initially for VAT with potential expansion to all tax types. - VAT refunds: expand a risk-based automated system to check VAT refund claims; develop an action plan to address accumulated outstanding VAT refunds in an orderly manner (structural benchmark, September 2017). - Tax audits: increase audit capacity, efficiency, and impact; implement risk-based case selection tool using third-party information; introduce an audit case management system and systematic approach to terminating non-productive audits. - Civil service and remuneration reforms: - 2017 State Budget Law limited compensation of employees and goods and services for most budget organizations; increases during year subject to government decree. - As of March 2017, employment at central level reduced with savings totaling GEL35 million compared to 2016 performance. - Amended Organic Law on Self-government allows Parliament to limit local government spending to adhere to general government expenditure limits in the Liberty Act. - New Civil Service Law to be implemented in 2017, classifying employees into grade structures. - Adopt a Remuneration Law for the civil service (structural benchmark, December 2017) to set salary ceilings (compensation grid) and consolidate bonuses and supplements into salary; ceilings set to ensure wage bill reduction over medium term consistent with program projections. ### PPP, SOE, and fiscal risk transparency reforms - PPP law and institutional framework: - Commit to adopt a new PPP law and associated regulations with assistance from WB, ADB, EBRD, and IMF. - PPP law to include best international practices: broad coverage including PPAs; clear definition focused on optimal risk sharing; strong MoF role in approval using cost-benefit and VfM analysis and fiscal risk assessment (Fiscal Risk Management Unit); transparent and competitive procurement (prohibit direct agreements); transparent reporting, accounting, and auditing of all PPP arrangements, including a ceiling on government exposure. - Consult with IMF in drafting PPP law; plan to submit PPP Law to Parliament in 2017 (structural benchmark, December 2017). - Fiscal Risk Statement enhancements (structural benchmark, December 2017): - 2018 Budget FRS to report more comprehensively on existing PPP-associated firm and contingent liabilities, include quantitative reporting of quasi-fiscal relationships, and expand analysis of contingent liabilities associated to SOEs. - Expand historical analysis of contingent liabilities associated to SOEs by up to five years; describe historical trends of SOE sector size relative to economy; analyze factors driving SOEs’ aggregate and individual financial performance and position; identify and evaluate quasi-fiscal relationships; develop methodology for sensitivity analysis and stress tests examining impact of changes in key variables on SOE financial performance and fiscal risks. - Public Investment Management Framework (PIMF) improvements: - Strengthen monitoring of public investment and MoF role by centralizing information at MoF to establish unique project pipeline, support project evaluations, prioritize investments and identify financing, and link projects with multi-annual budget process. - PIMF to cover PPP-type projects to ensure they are prioritized and assessed alongside traditionally-procured projects. *Memorandum of Economic and Financial Policies (MEFP), Attachment I, Government of Georgia.* ### 14. We believe that accurate and transparent public financial management is a ### 14. We believe that accurate and transparent public financial management is a ### Public Financial Management - Commitments: - Improve our fiscal rule to safeguard fiscal sustainability by initiating a review of our fiscal framework, including fiscal rules, to ensure support for medium-term fiscal objectives toward sustainability while granting flexibility over the economic cycle. Consultation with the Fund, including technical assistance, will take place. - Within the context of reviewing the fiscal rule, upgrade the presentation of public finances from GFSM 2001 to GFSM 2014 classification. - Issue guidelines for new budget lending operations, requiring reasonable expectation of repayment (structural benchmark, December 2017). - Comply with international standards by undertaking necessary steps to incorporate LEPL own-revenue and expenditures in government finance statistics. - Improve the quality of fiscal reports by reconciling in the annual budget document revisions to the medium-term budget estimates and including LEPLs own revenues and expenditures in the budget documentation starting in the 2018 Budget. ### Monetary Policy - Reinforce NBG’s independence; as a prior action the law was amended reverting to the original version assigning financial supervision responsibilities to the NBG (MEFP ¶15 context). - Inflation targeting framework: - Lowered inflation target to 4 percent in 2017 and 3 percent from 2018 onwards. - Forecasts: inflation expected to be above target during 2017 due to lagged exchange rate depreciation effects, rising world commodity prices, and one-off price increases from higher excises; projected to be below the target in 2018. - Policy reaction: refrain from excessive tightening in 2017 to avoid significant undershooting in 2018 and to support economic recovery. - Inclusion of an Inflation Consultation Clause (ICC) in the EFF arrangement: - Inflation developments monitored via dual consultation bands set symmetrically around the central point for headline CPI. - If actual inflation is higher or lower than the inner consultation band of ± 2 percent, the NBG will consult with IMF staff on reasons and policies to return to target. - If actual inflation is higher or lower than the outer consultation band of ± 3 percent, a consultation with the IMF Board will be triggered. - Exchange rate and reserves: - Maintain existing flexible exchange rate regime—foreign exchange interventions limited to smoothing excessive volatility without targeting a specific level or path. - Current level of gross international reserves is below the IMF-composite metric (ARA); will build up international reserves throughout the program, monitored by a floor on net international reserves (performance criterion). - Strengthening monetary policy transmission: - Plan to promote financial larization and encourage greater use of the lari. - Introduced a one-month monetary instrument; improved lari liquidity facilities and broadened eligible collateral pool. - Commit to signing a memorandum of understanding on information sharing for liquidity forecasting between the MoF and the NBG (structural benchmark, June 2017). - Submit to Parliament legal amendments to allow derivatives and repo transactions, including netting and close-out netting provisions in 2017. - Requested IMF technical assistance to continue strengthening the monetary policy framework. - Communication and transparency improvements: - Since April 2016, NBG started regular quarterly press conferences after MPC meetings and published forecast of monetary policy rate path in its monetary policy report. - Continue quarterly publication of monetary policy reports on a fixed pre-announced schedule with associated press conferences. - Introduce forward guidance and issue Guidelines for Monetary Policy Operations; IMF technical assistance requested. ### Financial Sector Policy - Strategic priorities: - (i) further strengthen supervisory and regulatory framework; - (ii) improve safety nets and bank resolution framework, enhancing crisis preparedness; - (iii) incentivize use of the domestic currency to reduce dollarization; - (iv) develop capital markets and implement pension reforms. - Strengthening regulation and supervision: - In line with FSAP recommendations: - Introduce, effective September 2017, liquidity coverage ratios (LCRs) for commercial banks, with preferential treatment for GEL deposits (structural benchmark, September 2017). - Introduce limits, with preferential treatment for local currency, for loan-to-value and debt-service capacity ratios per borrower at bank and non-bank financial institutions. - Issue regulation to phase in, by 2020, additional capital requirements for systematically important banks (structural benchmark, December 2017). - Submit to Parliament amendments giving the NBG oversight power for credit information bureaus (structural benchmark, December 2017). - Adopt regulations to increase minimum regulatory capital for commercial banks to GEL 50 million to be phased in by 2019 (structural benchmark, June 2017). - Introduce Basel’s Pillar 3 disclosure requirements. - Expand NBG authority to set prudential limits on a consolidated basis and expand supervisory oversight of holding companies; plan amendments to the Organic Law of the NBG by end-2017. - NBG and State Insurance Supervision Agency to develop supervision framework for financial conglomerates. - With IMF TA support, plan to start publishing a self-standing financial stability report with forward-looking analysis. - Strengthening financial safety nets while banking sector is healthy: - Submit amendments to NBG Organic Law to give NBG authority to resolve a bank through temporary administration at an early stage and define specific rules for temporary administration regimes by a normative act (structural benchmark, September 2017). - With World Bank and ADB support, submit to Parliament a law to introduce deposit insurance (structural benchmark, June 2017). - Request largest banks to develop recovery plans based on Financial Stability Board’s principles; with World Bank help, strengthen bank resolution framework by revising the NBG law to define resolution authority more clearly, including bridge banks and override shareholders’ economic interests. - Strengthen lender-of-last-resort capacity by submitting amendments to NBG Organic Law to remove possibility to give unsecured lending, mandate a penalty rate for emergency liquidity assistance (ELA), and provide the NBG authority to request government assistance when providing ELA, following international best practices. - Larization strategy: - Comprehensive plan to increase use of the lari by (i) increasing long-term lari funding; (ii) reducing foreign-exchange credit risks; (iii) promoting pricing in lari. - Specific measures: - Retail loans under GEL100,000 will only be allowed in local currency starting on January 1, 2017. - All prices will need to be solely advertised in lari starting on July 1, 2017. - Establish lari-denominated escrow accounts for real estate transactions. - Promote larization through capital market development and preferential treatment to lari in macro-prudential measures. - Capital market development and pension reform: - Focus initially on the bond market; NBG with Georgian Stock Exchange upgrading post trade infrastructure for automated settlement of corporate bonds and equities in a centralized manner. - Publish a multi-year calendar of government bonds to promote development of benchmarks along the yield curve (structural benchmark, December 2017). - Commit to introducing a funded pension pillar in 2018 to promote savings and create an institutional investor for long-term lari assets. - With World Bank assistance, submit a pension law to Parliament establishing a Pilar II pension system (structural benchmark, December 2017), followed by establishment of an independent pension fund agency, aiming to become effective in 2018. - Support development of a primary dealer institute, improve taxation of financial instruments (in line with IMF technical assistance), and introduce mandatory third-party vehicle insurance to support the insurance sector. ### Structural Reforms - Comprehensive agenda to achieve more robust and inclusive growth, with partner support from WB, ADB, EBRD, EIB, and the European Commission. - Reform priorities: - Scale-up infrastructure spending, improve education and vocational training, business environment, foreign trade relations, and land reform. - Target outcomes: boost long-term growth, diversify the economy, strengthen external position, increase prosperity and employment in rural areas, and reduce poverty. - Continue targeted social assistance and health care to protect the most vulnerable. - Infrastructure and spatial planning: - Aim to finalize the East-West highway and the South-North corridor by 2020 with international partner support. - Additional projects (ports, airports, railways) planned to transform Georgia into a transport and logistics hub connecting Europe with Asia; development of radial roads to better connect regions. - Procurement processes for local governments brought up to international standards. - Job creation and education reform: - Education reform (including vocational training) to improve job creation, productivity, and wages. - Address skills mismatch; set curriculum standards, a new teacher policy framework, introduce vocational training and adult learning. - Encourage employer participation in curriculum design and provide support to job seekers with information and guidance on occupation selection, preparation and retraining. - Business environment improvements: - Improved tax system and taxation environment; promote savings and investments. - Improved tax dispute resolution mechanism: bank accounts of taxpayers will no longer be garnished without a court ruling and tax audit timeframe will be regulated. - Establish a Business House by 2019 as a one-stop shop for enterprises. - Introduce IFRS for corporations and reform insolvency law to ensure adequate restructuring framework for viable businesses by 2018. - Apply Regulation Impact Assessments widely to analyze potential negative impacts of major policy decisions on businesses. - Land registration: - Law on the Special Rule for Systemic and Sporadic Registration of Land Parcels within the State Project and Improvement of Cadaster Data came into force on August 1, 2016 and will remain valid for 2 years. - Simplifies land registration and facilitates registration of agricultural land plots through waiver of fees. - Government will assist citizens in searching property ownership documents and dispute resolution through mediation. - Trade policy: - Deepening trade relations is a key priority; FTAs mobilize FDI in tradable sectors to improve competitiveness and reduce external vulnerabilities. - In addition to DCFTA with the EU, negotiations completed with the People’s Republic of China on an FTA; FTA negotiations in progress with Hong Kong; negotiations with Turkey aimed at extending current FTA; committed to pursuing other FTAs with priority countries. - Statistics strengthening: - Start publishing quarterly unemployment figures in May 2017 using newly designed labor force survey covering 6,000 households and following Eurostat methodology. - Broaden employment statistics by publishing hours worked. - From 2018, start publishing national accounts based on NACE 2 classification of sectors and compute GDP based on the supply, leveraging IMF TA. - Due to migration to NACE 2 classification, publish quarterly GDP by expenditure in constant prices in November 2019. ### Program Monitoring and Safeguards - Monitoring framework: - Program monitored through quantitative performance criteria, indicative targets, an inflation consultation clause and structural benchmarks. - Semi-annual program reviews based on December and June test dates. - All quantitative performance criteria and indicative targets listed in Table 2; prior actions and structural benchmarks set out in Table 3. - Technical Memorandum of Understanding attached to describe definitions of quantitative PCs and the inflation consultation clause as well as data provision requirements. - NBG safeguards: - NBG maintains a strong safeguards framework and internal controls environment; no significant changes since last assessment. - Continue to engage independent external audit firms to conduct the audit of the NBG in accordance with International standards. ### Key numeric program figures and dates (as presented) - Inflation target: 4 percent in 2017; 3 percent from 2018 onwards. - Consultation bands: inner consultation band ± 2 percent; outer consultation band ± 3 percent. - Larization measures effective dates: retail loans under GEL100,000 only in local currency starting January 1, 2017; prices advertised solely in lari starting July 1, 2017. - Land registration law: came into force on August 1, 2016 and will remain valid for 2 years. - Labor force survey coverage: 6,000 households; quarterly unemployment figures to start May 2017. - Pension reform timeline: introduce funded pension pillar in 2018; Pilar II pension law structural benchmark, December 2017. - Capital market benchmarks calendar: structural benchmark, December 2017. - Regulatory and supervisory structural benchmarks and deadlines (selected): - LCRs effective September 2017 (structural benchmark, September 2017). - Additional capital requirements phase-in by 2020 (structural benchmark, December 2017). - NBG oversight for credit bureaus submission to Parliament (structural benchmark, December 2017). - Minimum regulatory capital increase to GEL 50 million phased in by 2019 (structural benchmark, June 2017). - Amendments to NBG Organic Law by end-2017 to expand consolidated supervision authority. - Quantitative indicators excerpted from Table 2 (values shown as in source): - Floor on NIR of NBG (End-period stock, in mn US$): 1,210; 1,350. - Ceiling on augmented General Government deficit (in mn lari, cash basis): -330; -1,335. - Ceiling on the accumulation of net domestic expenditure arrears of the General Government (in mn lari): 0; 0. - Ceiling on the accumulation of external debt arrears of the Public Sector (continuous criterion) (in mn US$): 0; 0. - Ceiling on new public guarantees (continuous criterion) (in mn lari): 0; 0. - Ceiling on the cash deficit of the Partnership Fund (in mn lari): 0; 0. - Ceiling on the new borrowing of the Partnership Fund (in mn US$): 20; 20. - Ceiling on Primary Current Expenditures of the General Government (in mn lari): ...8,685. *Source: IMF staff report content provided in the supplied document.* ### Introduction of LCR for commercial banks, with preferential treatment of GEL-deposits (MEFP ### Introduction of LCR for commercial banks, with preferential treatment of GEL-deposits (MEFP ¶21) ### Key near-term structural actions and deadlines - Introduction of LCR for commercial banks, with preferential treatment of GEL-deposits (MEFP ¶21) — End-September 2017 - Adoption of regulation on capital add-ons in CAR for systemically important banks (MEFP) — End-December 2017 - Submit to Parliament legislation giving NBG oversight power over credit information bureaus (MEFP ¶21) — End-December 2017 - Increase in regulatory capital for commercial banks to GEL50 million, phased in by 2019 (MEFP ¶21) — End-June 2017 - Publication of a multi-year calendar for government benchmark bonds (MEFP ¶24) — End-December 2017 - Signing of a Memorandum of Understanding between the Ministry of Finance and the NBG on information sharing for liquidity forecasting purposes (MEFP ¶18) — End-June 2017 - Submission to Parliament legislation establishing deposit insurance as of January 1, 2018 (MEFP ¶22) — End-June 2017 - Submit to Parliament amendments to NBG Law to give authority to resolve a bank through a temporary administration at an early stage (MEFP ¶22) — End-September 2017 - Submission to Parliament a 2018 budget consistent with the fiscal deficit in the Fund-supported program (MEFP ¶10) — End-December 2017 - Adopt a remuneration law for public civil service (MEFP ¶12) — End-December (year implied 2017) - Action plan to address accumulated outstanding VAT refunds in an orderly manner (analysis, refund, set-offs, and write-offs) (MEFP ¶11) — End-September 2017 - Submission of a public-private partnership law to Parliament, establishing reporting and monitoring and requiring a ceiling on government exposure (MEFP ¶13) — End-December 2017 - Include all PPP and PPA liabilities, and expand analysis of contingent liabilities from state-owned enterprises in the 2018 Annual Fiscal Risk Statement (MEFP ¶13) — End-December 2017 - Issue guidelines for new budget lending operations requiring reasonable expectation of commercial returns (MEFP ¶14) — End-December 2017 - Submission of a pension law establishing a 2nd pillar pension system, and introducing indexation of public pensions (MEFP ¶24) — End-December 2017 ### Program assumptions and exchange rates (for program monitoring) - All foreign currency-related assets valued in lari at program exchange rates; amounts in other currencies converted into U.S. dollar amounts using cross-rates as of December 31, 2016. - Program Exchange Rates (Currency/US$): - SDR Special Drawing Rights: 0.7439 - GEL Georgian lari: 2.6468 - AUD Australian dollar: 0.7227 - CAD Canadian dollar: 0.7419 - EUR Euro: 1.0556 ### Institutional definitions and reporting obligations - General government: central government and local governments, excluding Legal Entities of Public Law; includes new funds or extra-budgetary entities with fiscal operations as per GFSM 2001; excludes state-owned companies and the Partnership Fund. Public sector includes general government, Legal Entities of Public Law, public financial and non-financial corporations, including the National Bank of Georgia. - Treasury Department reporting to IMF: - Monthly detailed information on general government revenues within two weeks after month end. - Monthly expenditures and arrears of central government within four weeks after month end. - Stock of general government debt, by currency and original maturity, within one month from end of quarter. - Daily cash balances in all general government accounts as of end of previous business day. ### Quantitative program targets (overview) - Targets assessed through performance criteria and an indicative target (Tables 2 attached to Letter of Intent): - Performance criterion (ceiling) on the augmented cash deficit of the general government. - Indicative target (ceiling) on the primary current spending of the general government. - Performance criterion (floor) on the net international reserves (NIR) of the NBG. - Continuous performance criterion (ceiling) on accumulation of external debt arrears by the general government. - Indicative target (ceiling) on new domestic expenditure arrears by the general government. - Performance criterion (ceiling) on new guarantees issued by the public sector. - Performance criterion (ceiling) on the cash deficit of the Partnership Fund. - Performance criterion (ceiling) on new borrowing by the Partnership Fund. - Program includes a consultation clause on the 12-month rate of inflation. - Performance criteria and indicative targets set for end-June 2017 and end-December 2017; monitored cumulatively from start of calendar year (NIR monitored as stock), continuous criteria monitored continuously. ### Inflation consultation mechanism - Inflation defined as 12-month percentage change of CPI as measured and published by GEOSTAT. - If observed year-on-year inflation for test dates falls outside the outer bands (Table 1), authorities will consult with the IMF Executive Board focusing on: (i) monetary policy stance and program consistency; (ii) reasons for deviation; (iii) proposed policy response. Access to Fund resources interrupted until consultation and review completed. - If inflation falls outside inner bands, authorities will consult IMF staff on reasons and proposed policy response. ### Definitions, adjustors, and reporting requirements (selected) - Augmented cash balance of general government: revenues minus expense, minus net acquisition of non-financial assets (GFSM 2001) minus net budget lending. Measured from financing side at current exchange rates established by NBG at transaction date. - Net budget lending: net acquisition of financial assets for policy purposes by general government (consistent with GFSM 2001). - Adjustors to ceiling on augmented cash deficit: - Adjust upward/downward by cumulative total amount of foreign-financed project loan disbursements above/below program amounts (subject to cap of $30 million per year). - Adjust downward by cumulative receipts from sale of non-financial assets above program amounts. - Supporting material for augmented cash deficit: - Domestic bank and nonbank financing data from NBG and Treasury within four weeks after month end. - External project financing and other external borrowing monthly from Ministry of Finance (specify projects by creditor) within two weeks after month end. - Data provided at actual exchange rates. - Data on receipts from sales of non-financial and financial assets monthly within two weeks after month end. - Data on securitized debt sold by NBG (including securities purchased by nonbanks) monthly within two weeks after month end. - Ceiling on current primary expenditures: primary current expenditures = expense (GFSM 2001) on cash basis minus interest payments. Expenditure data reported within four weeks after quarter end. - Continuous performance criterion on accumulation of general government external debt arrears: - Debt defined as per Guidelines on Public Debt Conditionality (Decision No. 15688-(14/107) adopted on December 5, 2014). - External payment arrears: all overdue debt service obligations (principal or interest, taking into account contractual grace periods) on debt contracted/guaranteed/assumed by central government, NBG, or any agency acting on behalf of general government. - Ceiling on new external payments arrears applies continuously; does not apply to arrears arising from external debt being renegotiated where creditor agreed no payment pending negotiations. - Supporting material: accounting of non-reschedulable external arrears by creditor transmitted monthly within two weeks after month end. - Continuous indicative target on accumulation of general government domestic expenditure arrears: - Domestic expenditure arrears: non-disputed payment obligations overdue after contractual term; arise from any expenditure item. Arise from non-debt liabilities not paid after 60 days of contractual payment date (or after 60 days if no contractual date). Wages, pensions or other entitlements unpaid after 30 days of due date considered in arrears. - Supporting material: accounting of new domestic expenditure arrears transmitted within four weeks after end of each month. - Guarantees: arise from explicit legal obligation of public sector to service debt in event of nonpayment, or implicit legal/contractual obligation to finance shortfalls. Guarantees under PPAs are excluded. ### Partnership Fund limits and reporting - Ceiling on cash deficit of Partnership Fund: measured as expenditures minus revenues. - Partnership Fund revenues: dividends from assets/investments; interest earnings from loans; fees for services and guarantees; other income from assets. - Partnership Fund expenditures: current and capital expenditures. Current includes compensation, purchase of goods and services, transfers, other payables, and interest payments. Capital expenditures comprise net acquisition of nonfinancial assets (GFSM 2001). Purchase of financial assets (lending/equity participation) not considered expenditures. - Ceiling on new borrowing by Partnership Fund: defined as gross accumulation of financial liabilities. - Supporting material: Ministry of Finance to provide Partnership Fund quarterly revenue, expenditure and financial operations within four weeks of quarter end. ### Net International Reserves (NIR) definitions, stock, and adjustors - NIR definition (U.S. dollars): foreign assets of NBG minus foreign liabilities of NBG, including all of Georgia’s liabilities to the IMF. - Foreign assets include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and reserve position in IMF. Pledged/encumbered assets excluded. - Foreign liabilities include outstanding liabilities to IMF (face value), SDR allocation, and other liabilities of NBG (including foreign currency deposits of financial institutions at the NBG and currency swaps and foreign exchange forward contracts with financial institutions), excluding foreign exchange balances in government’s account with NBG. - Stocks valued at program exchange rates for monitoring. - Stock of NIR amounted to US$1,330.2 million as of December 31st 2016 (at program exchange rates). - Budget support grants to general government: grants for direct budget support not related to project financing. Budget support external to general government: disbursements of commercial loans and loans from bilateral and multilateral donors for budget support. - Adjustors to the NIR floor: - Upward/downward by cumulative amount of any excess/shortfall of FX privatization revenue in foreign exchange above/below programmed amounts. - Upward/downward by cumulative amount of any excess/shortfall of budget support grants and loans compared to program amounts (Table 3). - Upward/downward for any excess/shortfall related to net issuance of the Eurobond from the general government relative to program amounts (Table 3). - Upward/downward by 75 percent for any excess/shortfall related to disbursements of project loans and grants to the treasury single account at the NBG relative to projected amounts (Table 3). - Supporting material: weekly foreign exchange cash flow table (details of inflows, outflows and NIR) provided within three working days following end of the week. ### Projected balance of payment support financing (Table 3) (in millions of U.S. dollars) - June 30, 2017 / December 31, 2017: - Projected privatization revenue: 0 / 0 - Budget support grants from external donors and not related to project financing: 3 / 49.3 - Budget support loans, including bilateral and multilateral donors for budget support: 13.7 / 188 - Net issuance of the Eurobond from the general government: 0 / 0 - Disbursements of project loans and grants: 116,2 / 227.7 *IMF Technical Memorandum of Understanding (TMU) excerpt from the program documents included in the MEFP.* ### Appendix to the TMU: The Partnership Fund ### Appendix to the TMU: The Partnership Fund ### Organization and operational structure - Legal Structure and Corporate Governance: - The Partnership Fund (PF) is incorporated as a Joint Stock Company (JSC). Under civil law, JSCs are profit maximizing entities, organized with value creation as their main objective. - The PF is organized as a commercial financial institution. Its governance structure includes: - An investment board, currently composed of internal members (CEO, CIO, portfolio officers) and can add external members (like experts and private sector representatives), which approves business cases and initiates projects; - A risk management committee, composed of internal members (CFO, Chief Legal Officer, and Chief Accountant), which advises on project risks to be reflected in project implementation agreements; - A supervisory board (i.e. board of directors), which approves projects (based on the feasibility studies, risk assessments, and business cases presented by the investment board and risk committee) and approves budget for project development needs. The supervisory board includes members of the government and is chaired by the Prime Minister; and - In cases of equity participation in projects, the PF needs government approval. ### Corporate mandate and portfolio management - Corporate Mandate: - The corporate mandate of the PF is approved by the supervisory board and the government. - The PF will provide project financing through equity participations, senior loan, quasi-equity through subordinated convertible debt, and performance bonds/guarantees. - Investments will focus on the following sectors: energy, agriculture, manufacturing, and real estate. - Under its corporate mandate, the PF is not allowed to provide financing to the service industry. - The PF will charge market rates for services provided. - Portfolio Management Strategy: - The PF’s portfolio management strategy has been developed. It sets portfolio limits, performance management objectives, and project evaluation guidelines, and will be based on the following principles: - The PF will participate only in commercially viable projects; and - The PF’s performance will be monitored on the basis of the following evaluation criteria: IRR, APV, sharp ratio, and risk adjusted return. ### Project development methodology - Participation and financing limits: - The PF will only participate in projects in which a corporate investor, with sufficient experience in industry, expresses its willingness to take an equity participation that represents at least 51 percent of the project’s total equity. - PF financing (debt plus equity plus guarantees) will not be allowed to exceed 100 percent of the equity of the private partner in the project. - The PF will pursue only commercial objectives. ### Reporting and auditing - The PF will engage an internationally recognized auditing company to conduct semi-annual IFRS audits of its financial statements. - The PF will hire on a permanent basis the services of rating agencies, which will prepare regular ratings reports—there will no minimum rating requirement for the PF. - The PF’s audited financial statements, as well as the ratings reports will be available on permanent basis to a broad audience. ### Fiscal risk considerations - Fiscal risks associated with the PF will be limited since: - The PF projects don’t create any kind of contingent liability for the sovereign balance sheet, as the government as no legal obligation to bail out the PF, should it become illiquid or insolvent; - All liabilities of the PF are limited to its own balance sheet; - The PF has its own revenue sources, namely: the dividends from its investments, the interest earnings from the loans its provides, the fees it charges on the guarantees it provides, and the proceeds of asset sales; and - The PF may decide to borrow from credible financial institution with recourse to its balance sheet facility and without state guarantee. *Appendix to the TMU: The Partnership Fund (cr1797).* ### 33.6 kilometer Kobuleti Bypass, which diverts heavy vehicle traffic from popular tourist ### 33.6 kilometer Kobuleti Bypass, which diverts heavy vehicle traffic from popular tourist ### Infrastructure projects and urban services - 33.6 kilometer Kobuleti Bypass diverts heavy vehicle traffic from popular tourist destinations, enhancing the quality of life and business environment in Kobuleti. - The Sustainable Urban Transport Investment Program: - A 10-year MFF of $300 million, runs until 2020. - Supports the public transport network and the development of efficient transport systems in key urban areas. - Under the MFF, four projects totaling $242 million have been mobilized to improve mass transit, essential road links, and coastal protection to date. - The Urban Services Improvement Investment Program: - An 8-year MFF worth $500 million, will be implemented until 2019. - Aimed at delivering safe water and sanitation to major cities and regional towns across Georgia. - The sixth and last tranche of the program in the amount of $99 million was approved in 2016 to finance the water supply and sanitation systems in the towns of Marneuli, Bolnisi, and Chiatura. - Regional Power Transmission Enhancement Project: - Approved in 2012 for $48 million. - Completed in December 2016. - Helped upgrade three power substations and build one new substation to enhance Georgia’s energy grid in Khorga, Ksani, Marneuli, and Menji. ### ADB financing and trade support - ADB as catalyst for private investments: - Provides direct financial assistance to the non-sovereign public sector and private sector in the form of direct loans, equity investments, guarantees, B loans, and trade finance. - ADB has approved $330 million in non-sovereign financing for seven private sector transactions in Georgia. - Total outstanding balances and commitments of ADB’s private sector transactions in the country, as of 31 December 2016, was $236 million. - ADB’s Trade Finance Program (TFP): - Fills market gaps by providing guarantees and loans through partner banks in support of trade. - In Georgia, the TFP works with three banks and has supported $89.2 million in trade through 40 transactions. - In Georgia, 25 percent of the trade supported through the TFP was co-financed by the private sector. ### Statistical issues — assessment and data adequacy (As of March 15, 2017) - General assessment: - Data provision has some shortcomings but is broadly adequate for surveillance. - Some room for improving the compilation and dissemination of price, national accounts, and external sector statistics. - Insufficient price and economic activity indicators to assess underlying inflation and output trends partly hamper the development of an effective inflation targeting framework. - The Fund has provided technical assistance (TA) to support the authorities’ effort to improve the compilation of macroeconomic statistics (Annex I, Table 1). - The data module of the Report on the Observance of Standards and Codes (ROSC), published in March 2012, indicated significant institutional and methodological improvements since the previous 2002 ROSC. - Georgia graduated to the IMF’s Special Data Dissemination Standard (SDDS) on May 17, 2010, after participating in GDDS since 2006. ### National accounts - Methodology and availability: - National accounts statistics follow the concepts and definitions of the System of National Accounts 1993. - Annual and quarterly GDP estimates are compiled by both the production and expenditure approaches. - Preliminary national accounts estimates in current prices by the production approach are available after 80 days and final estimates after 11 months. - Source data deficiencies noted in 2012 data ROSC: - Absence of an economic census. - Under-reporting in the business survey and household budget survey. - Shortcomings in the business register. - Incomplete coverage of some activities (trade, other community, social and personal activities). - Progress and improvements: - Since 2012 Geostat has made progress in updating the business register by using administrative sources (such as monthly and annual turnover data from the Revenue Service). - Amendments to the Law on Statistics which made reporting compulsory led to significant improvement in business reporting. - A better method is now used to benchmark quarterly national accounts (QNA) data to annual estimates. - Implementation of NACE rev. 2 classification of economic activities by the end of 2017 will improve coverage of a number of sectors. - Since 2015 GEOSTAT started publishing volume estimates of GDP by the expenditure approach at annual frequency covering the period 2010-14. - National accounts TA missions in 2013–15 initiated or partly implemented actions on several issues (benchmarking of QNA in current and constant prices, new methodology for estimating volume of taxes on products, compilation of unit values for imports). - TA missions are also supporting GEOSTAT in improving statistics on the deflator of various components of aggregate demand. - Although good progress has been made, there was scope for improving the constant price estimates and advancing the development of the system of supply and use tables. ### Price statistics - Scope and coverage issues: - CPI scope is limited to urban areas. - Owner-occupied housing is not covered by the CPI. - Structure of the producer price index (PPI) relies on output concept; product based indices are compiled on the lowest level of the overall PPI. - Export price indices are available at monthly frequency from 2014. - Import price indices are available at monthly frequency from January 2017. - Implementation of the agricultural price index survey ceased. - Imputation methods for both CPI and PPI are based on broadly accepted methods ensuring coherent long term treatment of seasonal goods. ### Government finance statistics - Reform status and methodology: - The Ministry of Finance is well advanced on a program of reform to fully adopt the Government Finance Statistics Manual 2001 (GFSM 2001) methodology and the International Public Sector Accounting Standards (IPSASs), including staged introduction of accrual recording into transactions data, and an expansion in the range of items recorded in the balance sheet. - The reform includes the implementation of accrual accounting by 2020. - Authorities’ commitment to the accounting reform strategy is set out in Decree 101 issued by the Minister of Finance on February 10, 2006. - Implementation of some individual steps in the transition plan will require amendments to the law of Georgia on the budget system (Budget System Law). - Since 2008, the budget classification follows the GFSM 2001. - Deficiencies remain in the sectorization of Legal Entities of Public Law (LEPLs) and securities are not recorded at market value. - The authorities report annual and monthly government finance statistics (GFS) compiled on a cash basis in the GFSM 2001 framework for publication in the GFS Yearbook and IFS, respectively. ### Monetary and financial statistics; financial sector surveillance - Monetary statistics: - The NBG compiles monetary data broadly in line with the recommendations of the Monetary and Financial Statistics Manual 2000. - Data are compiled based on STA’s Standardized Report Forms and reported to STA on a regular and timely basis for publication in the International Financial Statistics (IFS). - Financial sector surveillance: - Conducted by the NBG which supervises banks and other entities such as: credit unions, micro financial organizations, money remittance units and currency exchange bureaus. - Data on depository corporations are available on a quarterly basis. - The NBG publishes financial soundness indicators (core as well as additional) with the same frequency. - Income and expense statements and balance sheets of the aggregate deposit taking institutions are available on a monthly basis. ### External sector statistics - Compilation history and methodology: - The NBG began to take responsibility for the compilation of balance of payments statistics in January 2007. - It received extensive technical assistance from STA, including the STA Resident Statistics Advisor who undertook six peripatetic TA missions to Georgia during April 2007–October 2008. - From 2014 balance of payments data are compiled broadly in accordance with the definitions set out in the sixth edition of the Balance of Payments Manual (BPM6) and data in BPM6 are available from *International Monetary Fund — Georgia, selected project and statistical developments (excerpts).* ### 2000. However, along with the new revision, tables according to BPM5 are produced as well. The scope ### Statement by Mr. Doornbosch, Alternate Executive Director for Georgia, and Mr. Botel, Senior Advisor to Executive Director for Georgia (April 12, 2017) ### Data standards, coverage, and quality - Balance of payments scope: transactions of institutional units resident in Georgia with the rest of the world; excludes territories of Abkhazian Autonomous Republic and Tskhinvali Region. - Revision practice: BPM6 revision introduced, tables according to BPM5 produced as well. - Data ROSC: published on March 2012. - Source data adequacy and timeliness: generally adequate and timely. - Identified data weaknesses and needs: - Accuracy of enterprise survey data should be improved. - Foreign direct investment (FDI) data are subject to significant revisions. - International Transactions Reporting System (ITRS) quality can be improved through training of data reporters; compilers plan such activities. - Private nonfinancial external debt compilation system requires increased coverage. - Table of Common Indicators (as of 15/03/17) reported frequencies and data-quality assessments for multiple macroeconomic series (exchange rates, international reserve assets, reserve/base money, broad money, central bank balance sheet, consolidated banking balance sheet, interest rates, consumer price index, government finance indicators, external accounts, GDP/GNP, gross external debt, international investment position). ### Program request, rationale, and financing - Government request: a 36-month Extended Fund Facility in the cumulative amount of SDR 210.4 million (100 percent of quota). - Purpose of Fund financing: address balance of payments gap driven by persistent large current account deficits and build up reserve buffers against external shocks. - Program expected to unlock additional budget support from the European Union, the World Bank, the Asian Development Bank, and Agence Française de Développement. ### Macroeconomic outlook and assumptions - Recent performance: average growth of 2.8 percent in 2015-16. - Authorities’ view: a growth rate of 4 percent is achievable in 2017 given fiscal reforms and growth-friendly measures. - Program assumption (prudent): 3.5 percent real GDP growth in 2017. - Inflation targeting: - NBG targets inflation at 4 percent in 2017 and at 3 percent from 2018 onwards. - Staff and authorities expect convergence of annual (yoy) headline CPI inflation to the NBG’s 2018 target of 3 percent by year-end. - External position: program aims for a downwards adjustment of the current account deficit to 11 percent by 2020. - Reserves: gross international reserves currently below IMF ARA metric; to be raised throughout the program. ### Fiscal policy objectives and measures - Medium-term fiscal consolidation while providing space for capital spending. - Target: augmented cash deficit of the general government to be gradually reduced to 2.8 percent of GDP by 2020. - Public debt: stabilize around 45 percent of GDP. - Public investment: to be increased by reducing primary current spending from 25 percent of GDP in 2016 to 21.4 percent in 2020. - Means to reduce current spending: - Improve efficiency of public spending: contain the wage bill and administrative expenses, better target subsidies and social assistance, privatize loss-making SOEs. - Implement a strategic program to enhance revenue administration (2017-2020) focusing on VAT outstanding, tax audit capacity and efficiency. - Optimize the wage bill via a new Civil Service Law and a Remuneration Law setting salary ceilings. - Fiscal risks and contingent liabilities: - Identify risks associated with SOEs and PPPs, including Power Purchasing Agreements (PPAs). - Adopt a new PPP law compliant with best international practices. - Widen coverage of the Fiscal Risks Statement to include quasi-fiscal relationships and contingent liabilities associated with SOEs and PPPs. - Budget management: - Approved 2017 budget includes revenue-enhancing and expenditure-reducing measures. - Additional contingency measures on both spending and revenue sides to secure deficit targets if needed. - Fiscal framework to be revised to allow flexibility over economic cycles and increase transparency. ### Monetary and financial sector policies - Monetary policy framework: inflation targeting with exchange rate flexibility. - FX interventions limited to smoothing excessive volatility; no targeting of a specific level/path. - NBG to publish monetary policy rate path forecasts and issue guidelines for monetary policy operations. - Monetary instruments and liquidity management: - New one-month monetary instrument introduced. - Broadened list of eligible collaterals to facilitate maturity transformation. - MoF and NBG committed to sign a memorandum of understanding on information sharing for liquidity forecasting. - Larization (currency substitution) strategy: - Promote financial larization and greater use of the domestic currency. - Promote long-term lari funding and pricing in lari; reduce foreign-exchange credit risks. - Capital market development focused initially on the bond market. - Pension reform: introducing a second pension pillar in 2018 to create demand for long-term lari instruments. - Financial sector resilience and supervision: - Continue strengthening regulation and supervision in line with 2014 FSAP recommendations. - Introduce a deposit insurance scheme via law to Parliament. - Strengthen bank resolution framework: empower NBG to appoint temporary administration at early stages of banking distress; require largest banks to develop recovery plans based on Financial Stability Board principles. - Measures to strengthen NBG’s capacity as a lender of last resort. ### Structural reform agenda - Four Point Plan and Medium-Term Expenditure Framework (2017–20) core strategic directions: 1. Education reform to align skills with labor market demand, support job creation and productivity growth. 2. Invest in core infrastructure to develop Georgia into a transit and tourism hub and increase regional connectivity. 3. Strengthen governance and inclusive decision making; broaden one-stop shop coverage to improve public services. 4. Promote job creation by improving business and investment environment and enhancing private sector role. - Specific structural actions: - Scale up infrastructure focusing on core cross-country road projects and radial roads to better connect regions. - Education reform: set curriculum standards with employer participation; promote vocational training and adult learning. - Business environment improvements: introduce IFRS for corporations by 2018; reform insolvency law by 2018; establish a one-stop shop for business services by 2019; promote land registration. - Deepen trade relations to mobilize FDI in tradable sectors and diversify the economy. ### Implementation record and institutional context - Previous program (2014-2017 Stand-By Arrangement) not completed due to difficulties hitting fiscal targets, expansion of contingent liabilities, and proposed withdrawal of financial supervision from NBG. - New government (post-October 2016 elections) has adopted a prudent 2017 budget with cuts in current spending and politically difficult tax increases; drafted a PPP law; reversed legislation establishing financial supervisory agency outside NBG (completed prior action). - Authorities committed to full implementation; program conditionality designed to mitigate risks and provide safeguards. - Program justification: ambitious and prudent, builds reserve buffers and supports a wide range of structural reforms; qualifies for Extended Fund Facility given reform scope and time needed to build reserve buffers. *Source: Statement by Mr. Doornbosch and Mr. Botel (April 12, 2017).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr1797.pdf_