## 1geoea2020001

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### Context and immediate impact
- Performance under the Extended Arrangement has been good, but Georgia faces a pronounced economic slowdown and urgent balance of payments need due to COVID-19.
- Real GDP expected to decline by 4 percent in 2020; projections subject to more than the usual uncertainty.
- Current account deficit expected to widen to 11⅓ percent of GDP in 2020.
- Authorities face a balance of payments gap of $1.8 billion for 2020-21 (11.4 percent of GDP).
- State of emergency declared on March 20; confirmed cases remained below 300 as of mid-April.

### Request for IMF support
- Authorities requested additional financial assistance of 130 percent of quota under the Extended Fund Facility (about $375 million).
- Disbursement of this review (70 percent of the quota) to support the budget for urgent medical and socio-economic needs.
- Authorities have secured additional donor assistance expected to close the financing gap.
- Staff supports augmentation of 130 percent of quota; total access under the program at 230 percent of quota.
- IMF financing covers 21 percent of the financing gap caused by the COVID-19 shock over 2020–21.

### Recent macroeconomic developments (selected findings)
- 2019 growth: 5.1 percent.
- End-2019 inflation: 7 percent.
- Current account deficit in 2019: 5.1 percent of GDP.
- Financial account in 2019: deteriorated by 0.5 percent of GDP to 5.5 percent of GDP.
- Lari depreciation (Dec 2019 vs Dec 2018): nominal 7.9 percent; real effective terms 5.3 percent.
- Gross international reserves (GIR): reached 99 percent of the ARA metric.
- Public investment in 2019: 8 percent of GDP.
- Credit growth remained strong with subdued non-performing loans.

### COVID-19 sectoral shocks and market developments
- Tourism and travel (20 percent of GDP in 2019 in the BOP) halted; hospitality accounted for 7.1 percent of GDP at market prices in 2019.
- Hotel payments and reservations declined each by 50 percent y/y in mid-March 2020.
- Lari depreciated by around 20 percent vis-à-vis the dollar in March, recovered about half, remained around 10 percent down since the beginning of the year.
- NBG sold $100 million to prevent excessive volatility.
- Rising risk aversion prompted non-residents to sell domestic government securities; NBG started FX swap lines with banks and microfinance institutions in mid-April.

### Outlook and balance-of-payments projections
- Growth projections:
  - 2020 (Proj.): -4.0
  - 2021 (Proj.): 4.0
  - 2022 (Proj.): 6.0
  - 2023 (Proj.): 5.8
  - 2024 (Proj.): 5.5
  - 2025 (Proj.): 5.2
- Output gap: 2020 (Proj.) = -1.5; 2021 (Proj.) = -1.7.
- Inflation:
  - CPI, Period average 2020 (Proj.) = 4.7; 2021 = 3.6; end-2020 projection = 3.5; staff expects inflation to converge to the 3-percent target by end-2021.
- Balance of payments:
  - Staff projects BOP gaps of $1.4 billion in 2020 and $0.4 billion in 2021.
  - Financial account projected to deteriorate by 5.1 percent of GDP to 0.4 percent of GDP in 2020.
  - GIR expected to reach 104 percent of the ARA metric in 2020; about 95 percent after netting out expected proceeds from FX swaps that unwind by 2022.
  - Without support, GIR would fall to 69 and 56 percent of the ARA metric in 2020 and 2021 respectively.

### Fiscal stance, relief package and financing strategy
- Staff supports loosening the fiscal stance in 2020; authorities and staff agreed on an augmented deficit of 8.5 percent of GDP in 2020.
- Revenues projected to fall by 2.8 percent of GDP.
- Fiscal relief package totals 4.0 percent of GDP; increases total expenditure by 3.0 percent of GDP (compared to the Fifth Review) with partial offsets from reprioritization (0.3 percent in current spending and 0.7 percent of GDP in public investment).
- Deficit financing strategy:
  - Higher borrowing by 14.4 percent of GDP (domestic and external from donors).
  - Buildup of government deposits of 5.9 percent of GDP to be used if crisis worsens.
  - Part of IMF financing in 2020 will take the form of budget support.
- Medium-term anchor: bring public debt below 45 percent of GDP preserved; gradual fiscal consolidation starting in 2021 envisaged.

- COVID-19 one-off expenditure measures (MEFP ¶8) — totals (note: table figures preserved exactly):
  - Total: GEL 2,019 million — 4.0 percent of GDP
  - Goods and services: GEL 1,720.3 million — healthcare-related for Covid-19 (medical supplies, hospitalization, quarantine costs)
  - Subsidies: GEL 550 million — support to affected businesses (e.g. credit guarantee scheme) GEL 500 million; supporting additional supplies of 10 basic commodities GEL 500.1 million
  - Social benefits: GEL 1,247 million — healthcare-related for Covid-19 GEL 1790.4 million; direct transfers for employees in the private sector before Covid-19: GEL 700 million; compensation for self-employed and private sector employees who lose jobs: --; income tax relief to businesses who retain workers: --; direct transfers to families and people with severe disabilities: GEL 790.2 million; additional envelope to extend direct transfers to other vulnerable households: GEL 750.1 million
  - Subsidies for utility bills to households that consume < KV200 and 200m³ per mon: GEL 2150.4 million
  - Capital investment: GEL 500 million — healthcare investment (e.g. equipment)
  - Note: table figures preserved exactly as presented in source.

- Fiscal relief components (selected from Memorandum):
  - Social assistance for those at risk / lost employment: up to GEL700 million (1.4 percent of GDP); expected to benefit around 720,000 individuals.
  - Direct transfer of GEL100 to registered families with scores 65,000-100,000: cost GEL42 million (0.1 percent of GDP).
  - One-time transfer to informal economy participants: up to GEL75 million (0.14 percent of GDP).
  - Subsidy for electricity, natural gas, and utility bills: approximately GEL65 per month targeted for 3 months.
  - Increased healthcare expenditure for COVID-19 response: GEL350 million (0.7 percent of 2019 GDP).
  - Temporary support to businesses up to GEL500 million in 2020.

### Fiscal targets, adjustors and monitoring
- Proposed revisions:
  - Ceiling on augmented general government deficit QPC increased to GEL 2,300 million (end-June 2020).
  - End-December-2020 augmented deficit ceiling at GEL4,300 million (8.5 percent of GDP).
  - Ceiling on net budget lending QPC revised down to GEL40 million.
  - NIR floor QPC revised down to $1,120 million.
  - Authorities requested cancelling the adjustor on budget loan disbursements and proposed a new adjustor on healthcare current spending at GEL6,000 million.
  - Inflation consultation target revised up to 6 percent from 4.9 percent.
- Reporting requirements:
  - Data on domestic financing and external project financing provided monthly/within specific lags to IMF as specified in the TMU.
  - Detailed VAT refund and VAT credit reporting requirements and targets (e.g., aim to refund at least GEL600 million in 2020; mid-December 2020 stock target GEL1,470 million).

### Monetary policy, exchange rate, and reserves
- Moderately tight monetary policy stance agreed as suitable (MEFP ¶20).
- Policy guidance: balance impact of lari depreciation (argument for keeping rates high longer) with sharp weakening in demand (allows reducing rates).
- NBG actions and policy settings:
  - NBG sold US$100 million to provide FX liquidity.
  - NBG started FX swap lines with banks and microfinance institutions; staff assumes 50 percent utilization of swap lines, resulting in a GIR increase of $300 million.
  - Limits interventions to prevent disorderly market conditions; advised to smooth FX discretionary interventions for predictability.
  - Proposed lowering end-June NIR target and setting end-December NIR targets consistent with market conditions ("$330 million lower than in the Fifth Review").
  - GIR expected to reach "104 percent of the ARA metric in 2020", around "95 percent after netting out expected proceeds from FX swaps lines that are expected to unwind by 2022."

### Financial sector resilience and macroprudential measures
- Key measures taken:
  - Banks allowed to utilize capital conservation buffers (automatic prohibition on dividends and other payouts).
  - Postponed planned increases in capital buffers; permit banks to go below 100 percent of the LCR.
  - On-site inspections suspended; moratorium on fines for crisis-related breaches.
  - Banks offering three-month loan payment postponements to individuals and engaging with corporate borrowers on extensions.
- Liquidity and funding facilities:
  - Release of the capital conservation buffer ("2.5 percent, about GEL1.5 billion").
  - NBG may provide additional funding up to "GEL 1.7 billion" by lowering FX reserve requirements and broadening collateral (additional SME loans eligible; "50 percent haircut will be applied").
  - FX swap lines potentially providing lari liquidity for up to "$600 million (10 percent of FX liabilities of banks)."
  - MoF and NBG to coordinate issuance of up to "GEL600 million" government securities, with receipts placed in long-term bank deposits to provide lari liquidity.
- Credit and dollarization:
  - Real credit growth (at constant exchange rate) expected to be negative in 2020 and rebound only moderately in 2021-22.
  - Deposit dollarization and credit dollarization figures (Table 1):
    - Deposit dollarization 2020 (Proj.) = 62.4; 2021 = 58.4; 2025 = 51.5.
    - Credit dollarization 2020 (Proj.) = 51.6; 2021 = 49.2; 2025 = 45.6.
- Banking system indicators (selected):
  - Capital to risk-weighted assets (Table 5): 2016 = 15.1; 2017 = 19.1; 2019 (Mar) = 19.0.
  - Nonperforming to total gross loans (IMF definition, Table 5): 2016 = 3.4; 2017 = 2.8; 2019 (Mar) = 1.9.
  - Loan-to-deposit ratio: 2019 (Mar) = 121.7.

### Structural vulnerabilities and reform priorities
- Key structural priorities:
  - Reduce portfolio dollarization and discourage unhedged FX borrowing.
  - Continue structural reforms: education, insolvency framework, pension agency preparations, PPP methodology adoption (completed in mid-April), energy efficiency, trade integration.
  - Insolvency law draft submitted to Parliament in March 2020; licensing insolvency professionals targeted by end-December 2020.
  - Pension indexation rule to be submitted by end-April 2020; indexing rule specified for pensions below/above age 70 with GEL20/25 minimum nominal increases respectively.
  - Under conservative demographic scenario, basic pension spending would peak at 4.9 percent of GDP in 2028 (from 4 percent in 2020) and average 4.5 percent of GDP in 2020-50.

### Program implementation, conditionality and financing phasing
- Program implementation broadly satisfactory; most QPCs and SBs met; small slippages on some fiscal ITs and three SBs (insolvency legislation, PPP methodology, public pension indexation).
- Staff supports front-loaded disbursement: Sixth Review disbursement of 70 percent of quota (of which 65 percent of quota is from the augmentation) and channeling the related disbursement directly to the budget.
- Proposed phasing acknowledges that donor financing is mostly expected in 2020H2.
- Financing assurances in place for the Sixth Review: program fully financed over next 12 months with remaining BOP needs to be filled by multilateral and bilateral creditors (ADB, AfD, KfW, EBRD, EIB, E U, and the World Bank).
- Capacity to repay: full drawing would imply repayments to the IMF at 0.4 percent of GDP or 2.4 percent of GIR in 2025.

### Risks (Annex I highlights)
- Risks predominantly on the downside; duration and intensity of shock uncertain.
- Key risk scenarios and policy responses:
  - Prolonged Covid-19 outbreak (Relative Likelihood: High; Short Term) — Expected Impact: High. Policy response: allow exchange rate to adjust, targeted fiscal stimulus, regulatory flexibility, diversify tourism flows.
  - More protectionism (Relative Likelihood: High; Short to Medium Term) — Expected Impact: Medium. Policy response: allow exchange rate adjustment, consider fiscal space use, constrained monetary policy due to currency confidence needs.
  - Georgia-specific financial risks (Relative Likelihood: Medium; Short Term) — Expected Impact: High. Policy response: maintain tight monetary policy, strengthen resolution framework, adjust macroprudential measures.
  - Fiscal risks and political risks (Relative Likelihood: Medium; Short to Medium Term) — Expected Impact: High/Medium. Policy response: improve SOE governance and fiscal risk management; maintain macroeconomic discipline and strengthen social safety nets.

### Public debt and DSA (Annex III highlights)
- Gross public debt at end-2019: 42. percent of GDP.
- COVID-19 shock and fiscal relief raise public debt above 60 percent of GDP in 2020.
- Gross financing needs around 13 percent of GDP in 2020; expected to average 7.5 percent of GDP in 2022-25.
- Gross public debt expected to reach 51 percent of GDP by 2025.
- Over 96 percent of outstanding public debt is long-term; about ¾ is FX-denominated.
- Public debt remains sustainable in standardized stress tests and combined macro-fiscal shock scenarios.

### Staff appraisal and recommendations (summary)
- Staff welcomes swift policy response and supports widening the fiscal deficit to support the economy with temporary, targeted spending.
- Preserve medium-term fiscal sustainability and the 3-percent inflation target; allow for further gradual depreciation if needed, limiting interventions to excessive volatility and smoothing discretionary FX interventions.
- Safeguard financial stability with liquidity and capital support, while supporting viable households and enterprises and promptly recognizing losses.
- Continue structural reforms under the EFF: adopt pension indexation rule, implement insolvency framework, improve SOE governance, deepen local capital markets, and advance reforms to reduce dollarization.

*IMF staff — EXECUTIVE SUMMARY, April 24, 2020.*

### EXECUTIVE SUMMARY

### 1geoea2020001 - EXECUTIVE SUMMARY

### Context and immediate impact
- Georgia’s performance under the Extended Arrangement has been good, but the country is now facing a pronounced economic slowdown and an urgent balance of payments need due to the COVID-19 pandemic.
- Real GDP is expected to decline by 4 percent in 2020, with projections subject to more than the usual uncertainty.
- Lower exports, no tourism, and weaker remittances are expected to widen the current account deficit to 11⅓ percent of GDP in 2020.
- The authorities face a balance of payments gap of $1.8 billion for 2020-21 (11.4 percent of GDP).
- The authorities declared a state of emergency on March 20, imposing mobility restrictions and closure of non-essential shops; confirmed cases remained below 300 as of mid-April.

### Request for IMF support
- The authorities have requested additional financial assistance of 130 percent of quota under the Extended Fund Facility (about $375 million).
- The disbursement of this review (70 percent of the quota) will support the budget to help meet urgent medical and socio-economic needs.
- The authorities have secured additional donor assistance that is expected to close the financing gap.

### Recent macroeconomic developments (selected findings)
- 2019 growth: 5.1 percent; output gap broadly closed.
- End-2019 inflation: 7 percent (increased reflecting one-offs and nominal depreciation).
- Current account deficit in 2019: 5.1 percent of GDP (historic low).
- Financial account in 2019: deteriorated by 0.5 percent of GDP to 5.5 percent of GDP.
- Lari depreciation (Dec 2019 vs Dec 2018): nominal 7.9 percent; real effective terms 5.3 percent.
- Gross international reserves (GIR): reached 99 percent of the ARA metric.
- Public investment in 2019: 8 percent of GDP.
- Credit growth remained strong with subdued non-performing loans.

### COVID-19 shocks to sectors and markets
- Tourism and travel (20 percent of GDP in 2019 in the BOP) has stopped; hospitality accounted for 7.1 percent of GDP at market prices in 2019.
- Hotel payments and reservations reportedly declined each by 50 percent y/y in mid-March 2020.
- The lari depreciated by around 20 percent vis-à-vis the dollar in March, recovered about half, and remained around 10 percent down since the beginning of the year. The NBG sold $100 million to prevent excessive volatility.
- Rising risk aversion prompted non-residents to sell domestic government securities; in response the NBG started FX swap lines with banks and microfinance institutions in mid-April.
- Initial policy response included quarantine and treatment measures, deferring tax payments, allowing banks to utilize capital conservation buffers (with an automatic prohibition on dividends and other payouts), postponing planned increases in capital buffers, allowing banks to go below 100 percent of the liquidity coverage ratio (LCR), suspending on-site inspections, introducing a moratorium on fines for breaches due to the crisis, and banks offering three-month loan payment postponements to individuals.

### Program implementation and slippages
- Most quantitative performance criteria (QPCs) and structural benchmarks (SBs) were met.
- Net international reserves (NIR) exceeded the end-2019 QPC owing to lower-than-expected government FX expenditures.
- The fiscal deficit QPC was breached by only a small margin.
- Two fiscal indicative targets (IT) were missed by small margins; inflation exceeded the inner band of the consultation clause (ICC).
- Three SBs missed: insolvency legislation (completed in March), adoption of the PPP methodology (completed in April), and public pension indexation legislation (expected to be submitted in late April).

### Outlook and Balance of Payments projections
- Staff projects a sharp contraction in activity with growth at -4 percent in 2020 and a rebound starting in 2020Q4.
- Growth in 2021 is projected at 4 percent.
- Nominal depreciation will sustain inflationary pressures in 2020 but inflation is expected to converge to the 3-percent target by end-2021.
- Staff projects BOP gaps of $1.4 billion in 2020 and $0.4 billion in 2021.
- Current account deficit is expected to widen to 11⅓ percent of GDP in 2020.
- Financial account projected to deteriorate by 5.1 percent of GDP to 0.4 percent of GDP in 2020.
- BOP gaps are expected to be closed with IMF and donor financing.

### Risks
- Risks are on the downside: shock duration and intensity remain uncertain.
- A more protracted shock could: weaken aggregate demand for longer; increase BOP needs and the fiscal deficit; worsen bank asset quality and liquidity conditions; weaken subsequent recovery.
- Market pressures and further lari depreciation could increase headline inflation and dollarization.
- Election-related uncertainty with Parliamentary elections in October could interfere with the aftermath of the shock and delay reform efforts.

### A. Designing adequate fiscal support (policy stance and measures)
- Staff supports a loosening of the fiscal stance in 2020 to address the COVID-19 pandemic.
- Authorities and staff agreed on an augmented deficit of 8.5 percent of GDP in 2020.
- Revenues are projected to fall by 2.8 percent of GDP.
- The fiscal relief package to address the health and socio-economic impact of the shock totals 4.0 percent of GDP (see table below), increasing total expenditure by 3.0 percent of GDP (compared to the Fifth Review), as temporary spending measures are partially offset by spending reprioritization (0.3 percent in current spending and 0.7 percent of GDP in public investment).
- Deficit financing strategy: higher borrowing (by 14.4 percent of GDP), both domestic and external (from donors), with a buildup of government deposits (5.9 percent of GDP) to be used if the crisis gets worse or the recovery takes longer than currently envisaged. Part of IMF financing in 2020 will take the form of budget support.
- The medium-term fiscal anchor of bringing public debt below 45 percent of GDP is preserved. Staff supports plans for gradual fiscal consolidation starting in 2021 as one-off spending expires and revenues recover; if downside risks materialize consolidation would be more gradual with higher use of government deposits.

- COVID-19 one-off expenditure measures (MEFP ¶8) — totals:
  - Total: GEL 2,019 million — 4.0 percent of GDP
  - Goods and services: GEL 1,720.3 million — healthcare-related for Covid-19 (medical supplies, hospitalization, quarantine costs)
  - Subsidies: GEL 550 million — support to affected businesses (e.g. credit guarantee scheme) GEL 500 million; supporting additional supplies of 10 basic commodities GEL 500.1 million
  - Social benefits: GEL 1,247 million — healthcare-related for Covid-19 GEL 1790.4 million; direct transfers for employees in the private sector before Covid-19: GEL 700 million; compensation for self-employed and private sector employees who lose jobs: --; income tax relief to businesses who retain workers: --; direct transfers to families and people with severe disabilities: GEL 790.2 million; additional envelope to extend direct transfers to other vulnerable households: GEL 750.1 million
  - Subsidies for utility bills to households that consume < KV200 and 200m³ per mon: GEL 2150.4 million
  - Capital investment: GEL 500 million — healthcare investment (e.g. equipment)
  - Note: table figures preserved exactly as presented in source.

- SOEs and Partnership Fund:
  - Authorities will continue to limit operations of the Partnership Fund; no new investments nor net borrowing have taken place.
  - Classification exercise concluded that the Partnership Fund was a general government entity and should be included in general government reporting starting in 2021.
  - Authorities committed to refrain from taking over any SOE debt or providing equity injections to SOEs without a comprehensive strategy; an SOE strategy outlining policy principles to be formulated by end-March 2021.

- Tax administration and fiscal risks progress:
  - GRS advancing IT investment plan per IMF TA recommendations.
  - Automatic risk-based auditing and risk assessments since June 2019 made over 90 percent of new VAT credit declarations immediately eligible for refunds upon request.
  - Automatic refunding of net VAT credits starting May 2020.
  - PPP methodology adopted in mid-April.
  - Authorities committed to expanding the Fiscal Risk Statement (FRS) to include PPAs and SOEs with a new end-December 2020 structural benchmark.

- Pension indexation:
  - Authorities will submit to Parliament a rules-based mechanism for indexing basic public pensions by end-April 2020 (end-December 2019 SB).
  - Indexing rule: monthly pensions indexed to 12-month inflation for pensioners below age 70, and to 12-month inflation plus 80 percent of 6-quarter average real GDP growth for those above, subject to GEL20/25 minimum nominal increases, respectively.
  - Under a conservative demographic scenario, spending on basic pensions would peak at 4.9 percent of GDP in 2028 (from 4 percent in 2020) and average 4.5 percent of GDP in 2020-50.

### B. Preserving price stability and external buffers
- The authorities and staff agreed the moderately tight monetary policy stance is suitable for the moment (MEFP ¶20).
- Policy guidance: closely monitor inflationary expectations; balance the impact of lari depreciation (which argues for keeping rates high longer) with sharp weakening in demand (which allows reducing rates).
- Staff expects inflation to decline to target by end-2021, taking a year longer than envisaged at the Fifth Review due to nominal depreciation; declining inflation should create space to lower policy rates towards the end of 2020.

### C. Financial sector resilience (high-level)
- Providing adequate liquidity and releasing capital buffers in financial institutions would help sustain financial stability.
- Authorities allowed banks to utilize capital conservation buffers, postpone planned increases in capital buffers, and permit banks to go below 100 percent of the LCR.
- Banks asked to evaluate loan portfolio quality; on-site inspections suspended; moratorium on fines for crisis-related breaches.
- Banks proactively offered loan payment postponements and engaged with corporate borrowers on extensions.

### Program issues and financing
- Program implementation broadly satisfactory with some slippages noted above.
- Authorities have mobilized donor assistance to build external and fiscal buffers to support additional policy response and strengthen confidence.
- BOP gaps expected to be closed with IMF and donor financing.

*IMF staff — EXECUTIVE SUMMARY, April 24, 2020.*

### 15. Both sides concurred that a flexible exchange rate regime remains the first line of

### 15. Both sides concurred that a flexible exchange rate regime remains the first line of

### Exchange rate policy and reserves
- Flexible exchange rate regime is the first line of defense against external shocks like COVID-19 (MEFP ¶22-24).
- In a dollarized economy like Georgia, excessive lari volatility could become disruptive to financial stability.
- Foreign exchange (FX) interventions will be limited to prevent disorderly market conditions.
- The NBG will continue to primarily rely on ad-hoc discretionary interventions; complemented with smaller FX sales triggered by lari volatility and the need to support FX market liquidity.
- Staff advised the NBG to smooth FX discretionary interventions for greater predictability.
- The NBG is committed to upgrade the FX intervention policy, and strengthen NBG’s communication.
- Staff proposes lowering the end-June NIR target and set the end-December NIR targets consistent with the challenging market conditions (MEFP ¶23).
- The proposed targets are "$330 million lower than in the Fifth Review" to reflect likely FX sales to prevent disorderly market conditions that could result in a full-blown confidence crisis and financial instability.
- Georgia’s external position in 2019 was broadly consistent with fundamentals and desired policies, as persistently large and negative net international investment position (NIIP) offset improvements in the current account balance (Annex II).
- Donor assistance would support reserve levels in 2020, providing room for additional policy response if downside risks materialize.
- GIR is expected to reach "104 percent of the ARA metric in 2020", around "95 percent after netting out expected proceeds from FX swaps lines that are expected to unwind by 2022."
- Staff assumes "50 percent utilization of the swap lines, resulting in a GIR increase of $300 million."
- Without support, GIR would fall to "69 and 56 percent of the ARA metric in 2020 and 2021 respectively," which would undermine confidence and could trigger further lari depreciation, a surge in inflation, increased dollarization, and eventually, financial instability.

### Financial resilience and policy measures
- The NBG has relaxed capital requirements and released liquidity buffers to safeguard financial stability.
  - Release of the capital conservation buffer ("2.5 percent, about GEL1.5 billion") should cover additional provisioning due to expected deterioration in bank portfolios as a result of the COVID-19 shock.
  - The NBG may provide additional funding (up to "GEL 1.7 billion") to banks and microfinance institutions by lowering FX reserve requirements and broadening collateral requirements for temporary liquidity assistance to solvent financial institutions (additional SME loans become eligible; "50 percent haircut will be applied").
  - As banks face lari liquidity pressures, the NBG has announced FX swap lines potentially providing lari liquidity for up to "$600 million (10 percent of FX liabilities of banks)."
  - The MoF and NBG will coordinate issuance of up to "GEL600 million" government securities, with receipts being placed in long-term bank deposits to provide lari liquidity to banks. Banks could use the government as collateral to secure NBG funding.
  - Introduction of limits on large exposures is postponed until "June 2021." Authorities will regularly collect additional information from banks about the financial situation of large borrowers, perform stress testing, and monitor portfolio concentration risk.
- Daily FX transaction volumes declined during the COVID-19 shock (from "$4-5 million to $1.7 million per day").
- Local provisioning standards require higher provisions than under IFRS9, so banks’ capital would be hit more compared to international accounting standards.

### Credit provision and macroprudential stance
- Real credit growth (at constant exchange rate) will be negative in 2020 and rebound only moderately in 2021-22.
- Challenge for the NBG: sustain bank lending while safeguarding financial stability and maintaining banking system soundness.
- Staff supports temporary relaxation of capital and liquidity requirements, while maintaining supervisory standards to identify weaknesses in banks’ loan portfolio quality.
- Lack of capital may prevent banks from extending credit; close coordination between fiscal measures to support households and businesses and a relaxation of macroprudential buffers could help banks channel funds to the real economy.
- Staff supports authorities’ actions to strengthen the banking resolution framework:
  - Legislation on the new banking resolution framework was adopted (end-December 2019 SB), strengthening the NBG’s resolution authority mandate, improving resolution powers and toolkit, and clarifying roles of the NBG and the Ministry of Finance in systemic cases including emergency liquidity assistance.
  - NBG is advancing secondary legislation (end-June 2020 and end-December 2020 SBs), which is critical under current conditions.
  - NBG is considering increasing the coverage of deposit insurance and arranging market-based pre-financing for the government-backed resolution fund.

### Structural vulnerabilities and reform priorities
- Portfolio dollarization remains an important structural risk; continued efforts are needed over the medium term to promote loan larization.
- A comprehensive strategy after the crisis should discourage unhedged borrowers from taking FX-denominated loans and increase depositor confidence to save in lari, aligning macroprudential measures, FX intervention, and monetary policy.
- Structural reforms to support faster recovery and inclusive growth agreed with staff:
  - Education: remote teaching implemented; efficiency of distance learning being assessed and to be improved with World Bank support; some delays expected in rehabilitating schools; since January 2020, all teachers meet the new minimum qualification requirements.
  - Pension agency: working on selecting the custodian and the investment strategy allowing for portfolio diversification.
  - Insolvency law: draft submitted to Parliament in March 2020 (end-July 2019 SB); staff called for swift implementation once approved, and licensing insolvency professionals (end-December 2020 SB).
  - Continue improving business environment, notably by implementing the insolvency framework and improving the judiciary system.
  - Draft laws on energy efficiency and energy performance submitted to Parliament to support energy savings and competition in the energy market.
  - Trade integration: signing a free trade agreement with the UK for post-Brexit times; advancing negotiations to expand the agreement with Turkey and towards a free trade agreement with India.

### Program issues, financing, and conditionality
- Authorities and staff agreed on updated program conditionality (MEFP, Tables 1-3).
  - Authorities request a waiver of non-observance for the missed QPC on the augmented fiscal balance (deviation was minor).
  - NBG tightened the policy rate by a cumulative "250 bps" after inflation exceeded the inner band of the ICC in December 2019; staff agreed that, considering the COVID-19 shock, no further action would be required.
  - Changes to end-June 2020 quantitative performance criteria and target for inflation:
    - Ceiling on augmented general government deficit QPC increased to "GEL 2,300 million."
    - Ceiling on net budget lending QPC revised down to "GEL40 million."
    - NIR floor QPC revised down to "$1,120 million."
    - Authorities request cancelling the adjustor on budget loan disbursements and a new adjustor on healthcare current spending associated with the COVID-19 epidemic, proposed at "GEL6,000 million," which will also apply to the IT on primary current expenditure.
    - Inflation consultation target revised up to "6 percent from 4.9 percent."
  - New QPCs, ITs, and the ICC are proposed for end-December 2020.
  - New end-December 2020 SBs: authorities committed to (i) adopt the 2021 budget consistent with policies agreed at the time of the Seventh Review under the EFF arrangement, and (ii) expand the 2020 Fiscal Risk Statement following FAD TA advice.
- Augmentation and phasing of access:
  - Staff supports augmentation of "130 percent of quota," within normal access limits under the GRA.
  - Total access under the program, at "230 percent of quota," would help meet current and future external financing needs.
  - IMF financing covers "21 percent" of the financing gap caused by the COVID-19 shock over 2020–21, and catalyzes assistance from bilateral and multilateral donors to close the remaining gap.
  - Staff proposes a front-loaded disbursement for direct budget support with the Sixth Review ("70 percent of quota, of which 65 percent of quota is from the augmentation") (Table 8).
  - Proposed phasing of IMF support is appropriate, given that donor financing is mostly expected in "2020H2."
- Financing assurances in place for the Sixth Review (Table 9): program fully financed over the next 12 months, with remaining BOP needs to be filled by support from other multilateral and bilateral creditors (ADB, AfD, KfW, EBRD, EIB, E U, and the World Bank).
- Capacity to repay the Fund remains adequate; Georgia’s debt remains sustainable.
  - Full drawing would imply repayments to the IMF at "0.4 percent of GDP or 2.4 percent of GIR in 2025" (Table 10).
- Authorities requested channeling the related disbursement of this review ("70 percent of quota") directly to the budget.
  - NBG and MoF to agree on a Memorandum of Understanding to: (i) commit to maintaining funds received from the IMF in a government account at the central bank, pending their use, and (ii) clarify responsibilities for repaying IMF resources.

### Risks and staff appraisal
- Risks to the program are manageable, assuming continued sound policies and cautious policies proposed in this review.
- Risks to program implementation could increase in case of a worsened external environment or rising domestic social tensions; authorities would build additional buffers in 2020. Keeping the program on track would require policy adjustment, in consultation with staff.
- Staff appraisal highlights:
  - Staff welcomes authorities’ swift policy response to limit human and economic fallout of the pandemic.
  - Georgia faces a severe economic slowdown and significant balance of payments needs; Georgia will go into a recession this year, and gradually recover over the next 2 years.
  - Staff supports widening the fiscal deficit to support the economy; temporary increase in spending is appropriately targeted.
  - Authorities’ commitment to medium-term fiscal sustainability is important given higher public debt (partly reflecting depreciation) and possible fiscal risks; efforts to improve SOE governance would help reduce fiscal risks.
  - The NBG should continue to gear monetary policy towards achieving the "3-percent inflation target," in the context of a flexible exchange rate regime; allow for further gradual depreciation if needed, limiting interventions to addressing excessive volatility, and smooth discretionary interventions for predictability.
  - Safeguarding financial stability should be accompanied with support to viable, solvent enterprises and households; measures to support liquidity and promptly recognize losses are welcome.
  - Structural reforms should continue under the EFF arrangement: adopting the indexation rule for public pension will help sustain income levels of pensioners, while implementing the insolvency framework could support the recovery.

*Source: 15. Both sides concurred that a flexible exchange rate regime remains the first line of — IMF mission document excerpt.*

### 35. Staff supports the authorities’ requests for the completion of the Sixth Review,

### 35. Staff supports the authorities’ requests for the completion of the Sixth Review,

### Staff recommendation and rationale
- Staff supports the authorities’ requests for:
  - completion of the Sixth Review,
  - waiver of the non-observance for a QPC,
  - modification of performance criteria,
  - augmentation of access under the EFF arrangement,
  - use of the associated disbursement for budget support.
- Staff support is based on:
  - the severe impact of the pandemic,
  - the authorities’ existing and prospective policies to address this external shock,
  - the urgent balance-of-payments need,
  - the authorities’ policy commitments to the objectives under the EFF program.
- Use of disbursement for budget support is supported given frontloaded fiscal pressures to spend on healthcare and expand social welfare in the face of the COVID-19 shock.

### Real sector and inflation developments (Figure 1 highlights)
- Growth:
  - Growth picked up in 2019, supported by services and construction, but is now expected to decline.
  - Real GDP (Table 1, Real GDP): 2018 = 4.8; 2019 = 4.6; 2019 (Review) = 4.6; 2019 (New GDP) = 5.1; 2020 (EFF 5th Review) = 4.3; 2020 (New GDP) = 4.3; 2020 (Proj.) = -4.0; 2021 (Proj.) = 4.0; 2022 (Proj.) = 6.0; 2023 (Proj.) = 5.8; 2024 (Proj.) = 5.5; 2025 (Proj.) = 5.2.
  - Output gap (Table 1): 2018 = -1.5; 2019 = -1.0; 2019 (Review) = -1.0; 2019 (New GDP) = -0.5; 2020 (EFF 5th Review) = -1.0; 2020 (New GDP) = -1.0; 2020 (Proj.) = -1.5; 2021 (Proj.) = -1.7; 2022 (Proj.) = -0.5; 2023 = 0.0; 2024 = 0.0; 2025 = 0.0.
- Inflation:
  - Headline and core inflation remained above NBG’s target.
  - CPI, Period average (Table 1): 2018 = 2.6; 2019 = 4.9; 2019 (Review) = 4.9; 2019 (New GDP) = 4.9; 2020 (EFF 5th Review) = 4.5; 2020 (New GDP) = 4.5; 2020 (Proj.) = 4.7; 2021 = 3.6; 2022 = 3.0; 2023 = 3.0; 2024 = 3.0; 2025 = 3.0.
  - CPI, End-of-period (Table 1): 2018 = 1.5; 2019 = 7.2; 2019 (Review) = 7.2; 2019 (New GDP) = 7.0; 2020 (EFF 5th Review) = 3.0; 2020 (New GDP) = 3.0; 2020 (Proj.) = 3.5; 2021 = 3.0; 2022 = 3.0; 2023 = 3.0; 2024 = 3.0; 2025 = 3.0.
- Labor and real GDP per capita:
  - Real GDP per capita growth has surpassed that of peers; unemployment continues to decline.

### External sector developments (Figure 2 highlights)
- Current account:
  - The current account reached a historic high in 2019, but is expected to widen considerably in 2020.
  - Current account balance (Table 1, in percent of GDP): 2018 = -6.8; 2019 = -5.4; 2019 (Review) = -5.0; 2019 (New GDP) = -5.1; 2020 (EFF 5th Review) = -5.3; 2020 (New GDP) = -4.9; 2020 (Proj.) = -11.3; 2021 = -7.5; 2022 = -6.0; 2023 = -5.8; 2024 = -5.6; 2025 = -5.3.
  - Current account balance (Table 2, in millions USD): 2018 = -1,191; 2019 = -870; 2019 (Review) = -897; 2019 (New GDP) = -919; 2020 (Proj.) = -1,714; 2021 = -1,326; 2022 = -1,203; 2023 = -1,281; 2024 = -1,342; 2025 = -1,366.
- Tourism, remittances, and exports:
  - Tourism growth turning sharply negative in 2020 (Figure 2).
  - Exports, tourist receipts, remittances show large YoY swings in 2020 projections.
- Foreign exchange market and reserves:
  - In 2020, NBG’s FX sales addressed lari excess volatility and limited liquidity in the FX market.
  - Reserve coverage projected at adequate levels, supported by IMF and donor financing and FX swap lines.
  - Gross international reserves (Table 1, in billions of US$): 2018 = 3.3; 2019 = 3.3; 2019 (Review) = 3.3; 2019 (New GDP) = 3.5; 2020 (EFF 5th Review) = 3.4; 2020 (New GDP) = 3.4; 2020 (Proj.) = 3.5; 2021 = 3.6; 2022 = 3.8; 2023 = 4.1; 2024 = 4.4; 2025 = 4.6.
  - Reserve adequacy metrics (Table 2, memorandum): reserves in percent of IMF Composite measure (floating) 2018 = 95.4; 2019 = 96.4; 2019 (Review) = 96.4; 2019 (New GDP) = 99.4; 2020 (EFF 5th Review) = 95.0; 2020 (New GDP) = 95.9; 2020 (Proj.) = 103.9; 2021 = 98.5; 2022 = 98.4; 2023 = 101.3; 2024 = 103.3; 2025 = 105.5.

### International Investment Position and external debt (Figure 3 highlights)
- Net IIP:
  - The net IIP remained broadly unchanged in 2019.
- External debt composition:
  - Increases in private sector external debt were offset by NBG’s foreign asset accumulation.
  - Total external debt remains elevated, driven by the private sector.
  - Composition of external public debt, 2019 (Table 3a/3b summary figures):
    - IMF: 1.4 (percent of GDP)
    - World Bank: 11.0
    - EBRD: 1.4
    - Other multilaterals: 11.7
    - Bilateral: 5.0
    - Eurobond: 2.8
    - Short-term debt: 0.4
- External debt metrics:
  - Gross external debt (Table 1): 2018 = 100.3; 2019 = 118.6; 2019 (Review) = 109.3; 2019 (New GDP) = 103.4; 2020 (EFF 5th Review) = 117.2; 2020 (New GDP) = 108.1; 2020 (Proj.) = 136.3; 2021 = 124.1; 2022 = 114.7; 2023 = 111.1; 2024 = 106.9; 2025 = 103.1.
  - Gross external debt, excl. intercompany loans (Table 1): 2018 = 82.2; 2019 = 95.2; 2019 (Review) = 87.7; 2019 (New GDP) = 85.0; 2020 (EFF 5th Review) = 94.0; 2020 (New GDP) = 86.7; 2020 (Proj.) = 111.4; 2021 = 102.2; 2022 = 94.2; 2023 = 90.0; 2024 = 86.2; 2025 = 82.6.

### Fiscal sector developments (Figure 4 highlights and Tables 3a/3b)
- Fiscal balances and public debt:
  - The augmented fiscal balance improved from 2016 to 2019, but will decline in 2020 due to COVID-19 effects.
  - Augmented Net lending / borrowing (Program definition) (Table 1): 2018 = -2.3; 2019 = -2.3; 2019 (Review) = -2.1; 2019 (New GDP) = -2.0; 2020 (EFF 5th Review) = -2.7; 2020 (New GDP) = -2.5; 2020 (Proj.) = -8.5; 2021 = -4.8; 2022 = -3.0; 2023 = -2.6; 2024 = -2.2; 2025 = -2.1.
  - Public debt (Table 1): 2018 = 41.3; 2019 = 47.9; 2019 (Review) = 44.1; 2019 (New GDP) = 42.7; 2020 (EFF 5th Review) = 48.3; 2020 (New GDP) = 44.5; 2020 (Proj.) = 62.8; 2021 = 59.6; 2022 = 55.5; 2023 = 53.6; 2024 = 52.1; 2025 = 51.1.
  - Public debt net of government deposits (Table 1): 2018 = 38.8; 2019 = 44.4; 2019 (Review) = 40.9; 2019 (New GDP) = 39.8; 2020 (EFF 5th Review) = 44.4; 2020 (New GDP) = 40.9; 2020 (Proj.) = 54.0; 2021 = 51.2; 2022 = 48.2; 2023 = 46.6; 2024 = 45.1; 2025 = 43.8.
- Revenues and expenditures (Table 3b, percent of GDP):
  - Revenue: 2018 = 26.4; 2019 = 28.6; 2019 (Review) = 26.4; 2019 (New GDP) = 26.7; 2020 (EFF 5th Review) = 27.6; 2020 (New GDP) = 25.4; 2020 (Proj.) = 24.1; 2021 = 24.7; 2022 = 25.1; 2023 = 25.3; 2024 = 25.4; 2025 = 25.4.
  - Expenditures: 2018 = 27.2; 2019 = 30.5; 2019 (Review) = 28.1; 2019 (New GDP) = 28.5; 2020 (EFF 5th Review) = 30.0; 2020 (New GDP) = 27.6; 2020 (Proj.) = 32.3; 2021 = 29.1; 2022 = 27.9; 2023 = 27.6; 2024 = 27.4; 2025 = 27.1.
- Spending composition and financing needs:
  - Spending rebalanced from capital to current spending; social benefits were protected while goods and services spending declined.
  - Gross financing needs expected to peak in 2020-21 due to the impact of the Covid19 crisis.
  - Gross Financing Needs (Table 1, in percent of GDP): 2017 = 4; 2018 = 6; 2019 = 8; 2020 (Proj.) = 10; 2021 = 12; 2022 = 14; 2023 = 16; 2024 = 14; 2025 = 12; (note: table shows series across 2017-2025).

### Financial sector developments (Figure 5 highlights and Tables 4–5)
- Banking system soundness (pre-COVID-19):
  - Banks are liquid and well capitalized.
  - NPLs have stabilized and watch loans have maintained a downward trend.
  - Capital to risk-weighted assets (Table 5): 2016 = 15.1; 2017 = 19.1; 2018 (Mar) = 18.4; 2018 (Jun) = 19.1; 2018 (Sep) = 18.2; 2018 (Dec) = 19.0; 2019 (Mar) = 19.0; 2019 (Jun) = 19.5.
  - Nonperforming to total gross loans (IMF definition, Table 5): 2016 = 3.4; 2017 = 2.8; 2018 (Mar) = 2.7; 2018 (Jun) = 3.0; 2018 (Sep) = 2.9; 2018 (Dec) = 2.6; 2019 (Mar) = 1.9.
  - Loan-to-deposit ratio (Table 5): 2016 = 111.4; 2017 = 112.6; 2018 (Mar) = 115.6; 2018 (Jun) = 115.9; 2018 (Sep) = 116.6; 2018 (Dec) = 117.7; 2019 (Mar) = 121.7.
- Credit and deposits:
  - Loan-to-deposit ratio reached a historic high in December 2019.
  - Growth in lari-dominated credit to the private sector started to pick up in February 2020, while growth in lari deposits slowed.
  - Credit dollarization and deposit dollarization (Table 1):
    - Deposit dollarization (in percent of total): 2018 = 62.1; 2019 = 62.9; 2019 (Review) = 62.9; 2019 (New GDP) = 61.9; 2020 (EFF 5th Review) = 62.7; 2020 (New GDP) = 62.7; 2020 (Proj.) = 62.4; 2021 = 58.4; 2022 = 54.3; 2023 = 53.3; 2024 = 52.4; 2025 = 51.5.
    - Credit dollarization (in percent of total): 2018 = 55.8; 2019 = 53.7; 2019 (Review) = 53.7; 2019 (New GDP) = 54.4; 2020 (EFF 5th Review) = 51.3; 2020 (New GDP) = 51.3; 2020 (Proj.) = 51.6; 2021 = 49.2; 2022 = 48.3; 2023 = 47.4; 2024 = 46.5; 2025 = 45.6.
- Profitability:
  - Profitability has begun to recover notwithstanding lower net interest margins.
  - Return on assets (Table 5): 2016 = 3.1; 2017 = 3.1; 2018 (Mar) = 3.0; 2018 (Jun) = 2.4; 2018 (Sep) = 2.1; 2018 (Dec) = 2.4; 2019 (Mar) = 2.5.

### External debt sustainability and vulnerability (Figures 6 and Tables 6–7)
- External debt dynamics:
  - Baseline external debt (Table 6): 2016 = 84.3; 2017 = 85.0; 2018 = 82.2; 2019 = 85.0; 2020 (Proj.) = 111.4; 2021 = 100.6; 2022 = 92.8; 2023 = 88.7; 2024 = 85.0; 2025 = 81.6.
  - Change in external debt (Table 6): 2016 = 5.7; 2017 = 0.7; 2018 = -2.8; 2019 = 2.8; 2020 = 25.9; 2021 = -10.3; 2022 = -7.8; 2023 = -4.1; 2024 = -3.7; 2025 = -3.4.
- Stress tests and shock scenarios (Figure 6):
  - Scenarios include interest-rate shock, current account shock, combined shock, 30 percent real depreciation, and growth shock.
  - Example pathway: baseline external debt 72 (figure box) rising to 113 under 30% depreciation scenario.
- Vulnerability indicators (Table 7):
  - Current account balance (percent of GDP): 2018 = -6.8; 2019 = -5.1; 2020 (Proj.) = -11.3; 2021 = -7.5; 2022 = -6.0; 2023 = -5.8; 2024 = -5.6; 2025 = -5.3.
  - External public debt (percent of GDP): 2018 = 31.7; 2019 = 33.4; 2020 = 52.0; 2021 = 47.3; 2022 = 42.5; 2023 = 39.9; 2024 = 37.7; 2025 = 35.7.
  - External debt (percent of GDP, excluding intercompany loans) (Table 7): 2018 = 82.2; 2019 = 85.0; 2020 = 111.4; 2021 = 102.2; 2022 = 94.2; 2023 = 90.0; 2024 = 86.2; 2025 = 82.6.
  - Debt service on MLT external debt (in percent of exports of goods and services): 2018 = 19.3; 2019 = 19.3; 2020 = 25.5; 2021 = 19.0; 2022 = 16.2; 2023 = 13.1; 2024 = 13.4; 2025 = 13.6.

### Balance of payments and financing (Tables 2 and 9 highlights)
- Balance of payments projections (Table 2):
  - Trade balance (in millions USD): 2018 = -4,112; 2019 = -3,648; 2019 (Review) = -3,728; 2019 (New GDP) = -3,823; 2020 (Proj.) = -3,091; 2021 = -3,502; 2022 = -3,884; 2023 = -4,152; 2024 = -4,422; 2025 = -4,645.
  - Services credit (Table 2): 2018 = 4,482; 2019 = 4,517; 2019 (Review) = 4,586; 2019 (New GDP) = 4,673; 2020 (Proj.) = 2,032; 2021 = 3,300; 2022 = 4,711; 2023 = 5,738; 2024 = 6,631; 2025 = 7,262.
- Gross external financing needs and sources (Table 9):
  - Total financing requirement (in millions USD): 2018 = 2,444; 2019 = 2,059; 2020 (Proj.) = 3,659; 2021 = 2,769; 2022 = 2,271; 2023 = 2,432; 2024 = 2,635; 2025 = 2,815.
  - Total financing sources (in millions USD): 2018 = 2,387; 2019 = 2,186; 2020 (Proj.) = 2,073; 2021 = 2,246; 2022 = 2,502; 2023 = 2,747; 2024 = 2,891; 2025 = 3,028.
  - Financing gap and COVID-19 related donor commitments are reflected in detailed financing tables (Table 2 and Table 9).

### IMF program implementation and available Fund resources (Table 8 and Table 10)
- EFF program schedule and purchases (Table 8):
  - Approve the 36-month EFF: 12-Apr-17, Amount of Purchase: 30 SDR (14.3 percent of quota).
  - Subsequent reviews completed through 25-Oct-19 (fifth review) with repeated available purchases of 30 SDR (14.3 percent of quota).
  - Complete the sixth review based on end-December 2019 performance criteria: 12-Apr-20, Amount of Purchase: 147 SDR (70.0 percent of quota).
  - Total available: 484 SDR (230.0 percent of quota).
- Indicators of Fund credit (Table 10):
  - Stock of existing Fund credit (end period) 2019 = 180.0 (SDR); projections show stock rising with prospective purchases and then declining: 2020 = 180.0; 2021 = 177.5; 2022 = 165.0; 2023 = 142.5; 2024 = 112.5; 2025 = 82.5.
  - Prospective disbursements (Table 10): 2020 = 226.0 (SDR); 2021 = 78.0 (SDR).

*Source: IMF staff report and accompanying tables and figures contained in the provided content.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Global Shocks: More protectionism
- Relative Likelihood/Time Horizon: High; Short to Medium Term
- Expected Impact on the Economy if Risks Materialize: Medium
  - Protectionism could jeopardize Georgia’s plans to diversify its economy and become a regional transit hub.
  - A reduction in exports and FDI would reduce growth.
  - An increase in external imbalances would put pressure on the lari.
- Policy Response:
  - Allow the exchange rate to adjust to accommodate the shock.
  - Consider utilizing fiscal space to soften the negative impact on growth if output gap turns negative.
  - Monetary policy space will be constrained by the need to maintain confidence in the currency and keep inflation expectations anchored.

### Global Shocks: Prolonged Covid-19 outbreak
- Relative Likelihood/Time Horizon: High; Short Term
- Expected Impact on the Economy if Risks Materialize: High
  - Containment measures remain in place (in some places intensify or need to be re-introduced) through early 2021.
  - Longer containment and uncertainties about the intensity and the duration of the outbreak reduce supply (including through global value chains’ disruption) and domestic and external demand.
  - Deteriorating economic fundamentals and the associated decline in risk appetite result in a second wave of financial tightening (amplified as hidden fragilities are unmasked) and in debt service and refinancing difficulties for corporates and households.
  - Rising bankruptcies translate into financial institutions’ losses, forcing them to cut credit, with further adverse implications for growth.
  - Concerns about public debt sustainability mount, and EMs and frontier economies experience a greater number of sudden stops.
  - A disruption in tourism flows (notably countries like Iran and Russia), export demand and financial tightening could hurt growth and increase the pressure on the balance of payments.
- Policy Response:
  - Allow the exchange rate to adjust to accommodate the shock.
  - Adopt targeted fiscal stimulus measures for industries and companies affected by the outbreak.
  - Consider regulatory flexibility for coronavirus related liquidity difficulties.
  - Continue to diversify tourism flows to build economic resilience.

### Georgia-Specific Risks: Financial risks
- Relative Likelihood/Time Horizon: Medium; Short Term
- Expected Impact on the Economy if Risks Materialize: High
  - As a result of one of the global shocks above, exchange rate could depreciate rapidly undermining confidence in the currency and increasing inflation expectations.
  - Rapid depreciation in a highly dollarized economy could hurt growth and threaten financial stability as households and firms struggle to repay loans.
  - Higher inflation and depreciation expectations could result in a vicious cycle of loan conversions putting further pressure on the currency.
- Policy Response:
  - Maintain tight monetary policy to ensure confidence in the currency and keep inflation expectations anchored.
  - Strengthen the resolution framework to ensure that financial stability challenges can be addressed.
  - Adjust macroprudential measures to avoid an undue tightening of financial conditions.

### Georgia-Specific Risks: Fiscal risks
- Relative Likelihood/Time Horizon: Medium; Short to Medium Term
- Expected Impact on the Economy if Risks Materialize: High
  - Materialization of contingent liabilities/fiscal risks could put pressure on the deficit.
  - The need to cover contingent liabilities could result in lower capital spending or lower current spending, which has already been significantly compressed.
- Policy Response:
  - Continue improving SOE governance and fiscal risk management practices.
  - Utilize fiscal buffers accumulated due to capital markets development strategy.

### Georgia-Specific Risks: Political risks
- Relative Likelihood/Time Horizon: Medium; Short to Medium Term
- Expected Impact on the Economy if Risks Materialize: Medium
  - Political backlash or/and reform fatigue could undermine efforts to undertake structural reforms.
  - Policy uncertainty could undermine confidence and hurt growth.
- Policy Response:
  - Maintain macroeconomic policy discipline.
  - Strengthen social safety nets to protect the most vulnerable segments of the population and ensure that growth is sufficiently inclusive.

*Prepared by S. Saksonovs.*

### Annex III. Georgia: Public Debt Sustainability Assessment

### Annex III. Georgia: Public Debt Sustainability Assessment

### Recent debt position and drivers
- Gross public debt stood at 42. percent of GDP at end-2019.
- Public debt (net of government deposits) remained stable in 2016-19 as deposits rose on average by 0.2 percentage points of GDP over 2016-19.
- Fiscal discipline and buildup of government deposits, under the EFF arrangement, supported reducing public debt and the buildup of government deposits.
- Identified debt-creating flows in the baseline include a primary deficit contribution and other flows; automatic debt dynamics and exchange rate depreciation are material contributors to debt changes.

### Impact of COVID-19, 2020 increase, and medium-term projections
- The COVID-19 shock and the authorities' fiscal relief package raise public debt above 60 percent of GDP in 2020.
- Gross financing needs are around 13 percent of GDP in 2020.
- From 2021 onwards, the public debt-to-GDP ratio is projected to decline as one-off spending measures wane and growth resumes.
- Gross public debt is expected to reach 51 percent of GDP by 2025.
- Gross financing needs average 7.5 percent of GDP in 2022-25.
- Public debt (net of government deposits) is projected to decline below 45 percent of GDP in the medium term.
- The baseline medium-term fiscal path is characterized as realistic and in line with previous program commitments.

### Stress tests, scenarios, and realism assessments
- Public debt remains sustainable in all standardized macro-fiscal stress tests and in the combined macro-fiscal shock; debt and gross financing needs remain below high-risk thresholds in these tests.
- Under a constant primary balance scenario, debt would not stabilize; however, this scenario is not considered realistic given the unprecedented external shock and the authorities' track record of fiscal discipline.
- Figures present alternative scenarios (Baseline, Historical, Constant Primary Balance) with underlying assumptions including:
  - Baseline Real GDP growth: -4.0 (2020), 4.0 (2021), 6.0 (2022), 5.8 (2023), 5.5 (2024), 5.2 (2025)
  - Baseline Primary Balance: -6.6 (2020), -2.8 (2021), -1.2 (2022), -0.7 (2023), -0.3 (2024), -0.1 (2025)
  - Baseline Effective interest rate: 3.6 (2020), 2.7 (2021), 2.9 (2022), 3.2 (2023), 3.3 (2024), 3.3 (2025)
- The realism assessment includes forecast track record indicators for Real GDP growth, Primary Balance, and Inflation (GDP deflator) showing country forecast errors and percentile ranks versus all countries.

### Debt composition, vulnerabilities, and financing profile
- Over 96 percent of outstanding public debt is long-term maturity.
- About ¾ of the public debt is FX-denominated, making debt dynamics vulnerable to exchange rate depreciation.
- The authorities' strategy to deepen local capital markets is expected to reduce the share of FX-denominated debt over the medium term.
- The public debt service profile is relatively smooth, averaging 7 percent of GDP.
- In 2021, a $500-million sovereign Eurobond is maturing; authorities are discussing financing options.
- External gross financing needs are high, but reserves are described as adequate; much of the external debt service is owed to official creditors.

### Contingent liabilities, monitoring, and policy actions
- The public debt analysis covers the general government and does not incorporate contingent liabilities to the general government (fiscal risks from power purchasing agreements (PPAs) and SOEs).
- Under the EFF arrangement, the authorities have taken steps to assess, monitor, and report fiscal risks from PPAs and SOEs, including disclosing them in their annual Fiscal Risk Statement.
- Policy measures underway to strengthen debt sustainability include:
  - Deepening domestic/local capital markets to lower FX exposure.
  - Strengthening monitoring and disclosure of fiscal risks arising from PPAs and SOEs.

*Source: IMF staff, "Annex III. Georgia: Public Debt Sustainability Assessment."*

### 1. This memorandum reports on recent economic developments and updates the economic

### Memorandum on recent economic developments and updates to the economic and financial policy agenda of the National Bank of Georgia (NBG) and the Government of Georgia

### Macroeconomic framework
- Growth projections and inflation:
  - Growth is projected at -4 percent in 2020, a revision of 8.3 percentage points lower compared to the Fifth review projection.
  - Sharp contraction expected in 2020Q2-Q3, followed by a gradual recovery.
  - Inflation is expected at 3½ percent at end-2020 and will remain somewhat above the three-percent target, reflecting nominal depreciation (the lari has depreciated by 10 percent in nominal effective terms since December 2019).
  - Growth is expected to rebound to 4 percent in 2021, 0.8 percentage points lower than the Fifth Review projection.
  - Medium-term growth projections remain unchanged; current account deficit projected to gradually decline to 5.3 percent of GDP and net FDI inflows expected to reach 5.6 percent of GDP by 2025.
  - Inflation should decline to target by end-2021 as exchange rate effects fade and monetary policy adjusts.

- External sector and reserves:
  - Projected balance-of-payment (BOP) financing need of $ 1.  8 billion in 2020-21, to be financed with an EFF augmentation and donor assistance.
  - Current account deficit expected to widen to 11.3 percent of GDP due to lower tourism receipts and lower growth in trading partners hurting exports and remittances.
  - 2020 financial account projected to deteriorate significantly (by 5.1 percent of GDP y/y, to 0.4 percent of GDP) due to portfolio and deposits outflows and lower FDI inflows.
  - FX reserves will remain stable at about 104 percent of the ARA metric in 2020, but will fall to around 98 percent in 2021 as currency swaps are unwound.
  - Expected external financing: $1.4 billion in 2020 and $0.4 billion in 2021 from IMF and other donors.

- Risks and policy stance:
  - Risks are predominantly on the downside; uncertainty about duration and full impact of the pandemic and path to recovery in Georgia and trading partners.
  - First line of defense: continued commitment to exchange rate flexibility and sound macroeconomic and financial policies.
  - Additional IMF and donor resources expected to help anchor confidence against negative shocks, including regional instability and financial market volatility.

### Fiscal policy — near-term response and fiscal stance
- Fiscal impact and overall deficit:
  - The pandemic has imposed substantial fiscal costs, to be financed mainly by drawing down deposits and increasing donor borrowing.
  - Augmented general government deficit (program definition) expected at 8.5 percent of GDP in 2020, compared to the Fifth Review projection of 2.5 percent of GDP.
  - Lower economic activity would reduce revenues excluding grants by 3.3 percent of 2020 GDP compared to the Fifth Review projection.

- Use of reserves and compliance with prior ceilings:
  - End-December 2019 ceiling on the augmented deficit (QPC) and indicative ceilings on primary current spending and VAT refunds (ITs) were missed by small margins.
  - An earlier-than-expected donor disbursement caused the end-December 2019 augmented deficit ceiling to be exceeded by 0.02 percent of GDP.
  - Primary current spending on goods and services was marginally higher than expected (0.2 percent of GDP).
  - Mid-December stock of outstanding VAT credits exceeded the indicative ceiling of GEL1,570 million by GEL28 million.

- Fiscal relief package — targeted, temporary, timely measures (costs and coverage):
  - Social assistance for those who lost or are at risk of losing employment: up to GEL700 million, 1.4 percent of GDP; expected to benefit around 720,000 individuals in formal employment before the COVID-19 pandemic.
    - Direct transfers up to GEL150 per month—equal to the income tax on the first GEL750 of the salary—to companies supporting employment retention; effective for up to 6 months.
    - Direct monthly transfers of up to GEL200 for laid-off employees and self-employed individuals who can verify income loss for up to 6 months.
  - Direct transfer of GEL100 to families registered in the social ranking system with a score of 65,000-100,000, for up to 6 months; expected to benefit around 70,000 families, total cost GEL42 million (0.1 percent of GDP).
  - Direct transfer of GEL100 to families with 3 and more children of 0-16 age, registered in the social ranking system with a score below 100,000, for up to 6 months; expected to benefit around 21,000 families, total cost GEL13 million (0.03 percent of GDP).
  - Direct transfer of GEL100 to people with severe disabilities (including children with disabilities), for up to 6 months; expected to benefit around 40,000 children, total cost GEL24 million (0.05 percent of GDP).
  - One-time transfer to informal economy participants facing vulnerable conditions, budgeted for up to GEL75 million (0.14 percent of GDP).
  - Subsidy for electricity, natural gas, and utility bills of approximately GEL65 per month targeted to households consuming less than KV200 and less than 200 m3 per month, for 3 months; expected to benefit 1,100,000 electricity- and 651,000 gas-subscribers.
  - Increased healthcare expenditure for COVID-19 response: GEL350 million (0.7 percent of 2019 GDP), including GEL50 million in healthcare-related infrastructure and specialized equipment.
  - Building a stock of basic food products with price subsidy: total cost GEL50 million (0.1 percent of GDP).
  - Temporary support to businesses up to GEL500 million in 2020, coordinated with IMF and donors; measures to guarantee equal and transparent access, preserve competition, avoid FX-risk coverage or directed support to a specific company; revamp of the credit guarantee scheme with loans co-financed with and administered by commercial banks; additional temporary schemes subject to retention-of-workforce condition and targeted to specific sectors; support aimed at companies in good financial standing before January 1st, 2020.

- Fiscal ceilings and adjustments:
  - Proposed revision of end-June 2020 augmented deficit ceiling to GEL2,300 million and end-December-2020 augmented deficit ceiling at GEL4,300 million (8.5 percent of GDP).
  - Primary current spending caps: not to exceed GEL6,000 million by end-June (IT), and GEL12,450 million by end-December.
  - Propose adjusting augmented fiscal balance and primary current spending ceilings for any additional healthcare spending directly related to the COVID-19 pandemic, as defined in the TMU.
  - Commitment to use revenue over-performance (excluding grants) or under-execution in current or investment spending to lower the augmented fiscal deficit; available financing to build fiscal buffers for downside risks in consultation with the IMF.
  - Target for mid-December 2020 stock of VAT credits: GEL1,470 million (IT); aim to refund at least GEL600 million in 2020, with additional refunds accommodated through an adjustor to the deficit ceiling (see TMU, ¶14).

- Medium-term fiscal strategy and debt:
  - Continue balancing social and infrastructure spending with fiscal consolidation to bring public debt (net of government deposits) below 45 percent of GDP.
  - In 2021 expect to unwind most temporary COVID-19 measures; augmented fiscal deficit projected at GEL2,600 million (4.8 percent of GDP).
  - Commitment to adopt the 2021 budget consistent with policies agreed at time of the Seventh Review under the EFF arrangement (new end-December 2020 structural benchmark).
  - Strengthen Fiscal Risk Statement to expand estimates associated with PPPs and PPAs; analyze regulatory and export-price risks associated with PPAs in the FRS.
  - Public debt (net of government deposits) will increase to XX percent of GDP due to nominal depreciation and pandemic response, above the EFF anchor (45 percent of GDP); commitment to a declining debt path with sustained fiscal discipline.
  - Measures to improve public administration efficiency: (i) contain the wage bill and administrative expenses; (ii) improve targeting of subsidies and social assistance programs; (iii) develop strategy to address financial vulnerabilities and improve corporate governance in SOEs; (iv) broaden performance-based budgeting.
  - Before major energy investments, conduct in-depth public finance and medium-term fiscal sustainability analysis in consultation with the IMF.

- Fiscal safeguards and public entities:
  - Will not accumulate general government external debt payment arrears outside those under negotiation (performance criterion).
  - Will not accumulate net domestic expenditure arrears of the general government (indicative target).
  - Will not issue new public guarantees (performance criterion) or comfort letters.
  - PPP framework made fully operational in mid-April by approving Value-for-Money (VfM) methodology and incorporating it in PPP guidelines (end-March 2020 structural benchmark).
  - Refrain from taking over SOE debt or providing equity injections without a comprehensive strategy supporting commercial viability and improving corporate governance; consult IMF on strategy and specific measures.
  - Public corporations will refrain from new quasi-fiscal activities; commit to report quasi-fiscal operations in the Fiscal Risk Statement.
  - Formulate SOE strategy by end-March 2021, including ownership rationale, framework to identify and report quasi-fiscal activities, and measures to enhance SOE corporate governance.
  - Limit Partnership Fund (PF) operations: gross acquisition of financial and non-financial assets other than cash and bank deposits limited to zero except for existing commitments in ongoing projects (continuous performance criterion); PF will not undertake new projects nor engage in net borrowing (continuous performance criterion).

### Structural fiscal policies — revenue administration and tax administration reforms
- Organizational and capacity improvements:
  - Restructured Georgia’s Revenue Service (GRS) and hired additional personnel; created specialized units for large taxpayers within the Audit Department and the Taxpayer Services Department.

- IT strategy and investments:
  - Launch IT strategy for GRS and an IT investment plan by end-September 2020, including: (i) infrastructure sustainability assessment, (ii) application sustainability assessment, (iii) inventory of business functionality improvement and data analytics needs.
  - Aim to approve the strategy and roadmap by end-May 2020.
  - Commit to bolster IT capacity by hiring additional staff or seeking a private sector IT partner; replace unsupported software in a timely manner.

- VAT administration and refund stock:
  - Commitment to eliminate unrefunded VAT credits.
  - Target: reduce by at least 50 percent the outstanding stock of VAT credits within the limitation period for audit (from GEL1.4 billion at end-2017 to GEL700 million by end-2021).
  - For the stock of existing credits, commit to audit or risk-assess 100 percent of declarations (within statute of limitations for audit) by mid-2020.
  - Since June 2019, more than 90 percent of new credit declarations immediately eligible for refund if requested and no outstanding tax liabilities (end-June 2019 structural benchmark); remaining high-risk declarations reviewed by specialized VAT unit.
  - Automatic refunding of new VAT credits starting May 1st, 2020: all risk-assessed and approved new credits to be offset against liabilities or refunded without taxpayer request; electronic VAT declaration form to require bank account details.
  - Option to offset existing stock against new liabilities remains; taxpayers retain option to request cash refund for stocks within three-year statute of limitations via separate form.

- Compliance, audits, and case management:
  - Plan to use risk-based audits (with IMF TA) to identify higher-yield non-compliant cases; developed audit plans for balanced tax-category coverage.
  - Pilot audit case management system expected to start in pilot mode by June 2020, becoming fully operational by end-August 2020 (after procurement delays).
  - Ensure IT strategy and resources to achieve objectives.

- Filing compliance and taxpayer register:
  - Established key performance indicators to improve filing compliance; note that tax deferrals after COVID-19 may delay progress.
  - Program initially for VAT expanded to all tax categories.
  - Legal amendments approved so that an unfiled declaration is no longer deemed a nil declaration where MoF requires a declaration; MoF issued order defining cases needing a declaration.
  - Adopted ministerial decree clarifying tax registration requirements and giving GRS mandate to enforce registration compliance and issue tax identification numbers.
  - GRS will create and maintain a register of employees for tax administration purposes.

- Inter-agency information sharing:
  - Since October 2019, GRS received regular access to information from other ministries and National Agency of Public Registry on real estate transactions, rentals and leases; working to expand information sharing with other government agencies and Financial Monitoring Service (FMS) on suspicious transactions as defined in law on Automatic access to third-party information.
  - GRS signed agreement with Tbilisi municipality to receive access to monthly information on construction permits starting in February 2020.
  - Plans to receive available information from the NBG on Joint Stock Companies (JSC) partners and changes in company equity on a regular basis by end-2020, recognizing improvements in data collection are required.

*Source: Memorandum reporting on recent economic developments and updates to the economic and financial policy agenda of the National Bank of Georgia and the Government of Georgia.*

### 17. We are committed to contain fiscal risks to safeguard fiscal sustainability. In

### 17. We are committed to contain fiscal risks to safeguard fiscal sustainability. In

### Fiscal risk management, PPPs, and SOEs
- Adopted a new PPP law and associated regulations: Parliament approved a PPP law in May 2018, and a government decree implementing the PPP law was issued in August 2018.
- Assessed the stock of PPP liabilities based on the relevant International Public Sector Accounting Standards; assessment to be updated regularly and included in the annual Fiscal Risk Statement.
- Continued strengthening the Fiscal Risk Statement (FRS) accompanying the budget:
  - The FRS in the 2020 budget documentation has included a more comprehensive coverage of general government financial asset operations and provided information on the rates of return on general government equity holdings and loans (structural benchmark, end-December 2019).
  - Commitment to expand the FRS in line with FAD TA recommendations by including:
    - (i) a sub-section on the sectorization exercise,
    - (ii) a risk analysis of the top 10 SOEs,
    - (iii) an assessment of the gross financing requirements of major SOEs, and
    - (iv) updated estimates of the quasi-fiscal activities (new end-December 2020 structural benchmark).
- Strengthened monitoring of SOEs:
  - The MoF and the Ministry of Economy and Sustainable Development (MOESD) collect data on SOEs (performance information, transfers, borrowing, guarantees, litigation) at least annually.
  - Finalized a complete inventory of SOEs, classifying them into public corporations and general government entities under GFSM2014, in line with IMF TA recommendations (end-March 2020 structural benchmark).
- Improved the Public Investment Management Framework (PIMF):
  - PIMF covers PPP-type projects alongside traditionally procured projects.
  - In coordination with the IMF: (i) strengthened public investment management methodology for appraisal, selection and management; and (ii) improved reporting and oversight requirements by updating the Government Decree on PIM methodology (end-December 2019 structural benchmark).
  - Designed a system for regular intra-year reporting of project implementation progress.

### Fiscal transparency, accounting, and MTBF
- Make the coverage of General Government consistent with the classification of SOEs into General Government units and Public Corporations; changes to PFM legislation required. From January 2021, all fiscal reports will incorporate these changes.
- Strengthen the Medium-Term Budget Framework (MTBF): Since the 2020 budget, regular discussions on compliance with the fiscal rule, revised expenditure plans, and any projected deviation from previous years’ MTBF.
- Improve quality of fiscal reports and comply with international accounting standards:
  - Starting in 2021, produce an annual consolidated central government sector financial report based on International Public-Sector Accounting Standards (IPSAS) basis.

### Monetary policy: inflation targeting, exchange rate, and reserves
- Continue to abide by the Inflation Consultation Clause (ICC):
  - Dual consultation bands set symmetrically around the forecast for headline CPI.
  - Inner consultation band: ± 2 percent — NBG consults with IMF staff if actual inflation lies outside.
  - Outer consultation band: ± 3 percent — consultation with the IMF Board is triggered if actual inflation lies outside.
- End-December inflation triggered consultation with IMF staff; higher-than-projected inflation attributed to one-off increases in excises in 2019H1 and rapid passthrough from nominal depreciation in 2019H2.
- NBG tightened policy rates by a cumulative 250 bps since September 2019; monetary policy stance considered moderately tight.
- Commitment to inflation targeting (IT) framework to maintain price stability while monitoring inflationary expectations amid a widening output gap and the COVID-19 pandemic.
- Maintain a flexible exchange rate regime with a floor on net international reserves (NIR, performance criterion); FX interventions focused on smoothing excessive volatility and supporting FX availability.
- Identified additional BOP needs of $1,790 million in 2020-21 due to the COVID-19 shock.
- Projected GIR at 104 percent of the ARA metric by end-December 2020; expect lower net international reserves due to interventions.
- Proposed changes to NIR performance criteria:
  - Change end-June NIR floor QPC to $1120 million.
  - Set end-December 2020 QPC to $1,100 million.
- Medium-term goals:
  - Build adequate reserves, upgrade FX intervention policy, strengthen NBG’s communication.
  - Project GIR to reach 105 percent of the ARA metric by 2025.
- FX liquidity facilities (April 2020 onward):
  - Established temporary FX swap lines with financial institutions up to a maximum amount of $400 million.
  - Establish standing swap line facility for commercial banks to access lari liquidity at a penalty rate.
  - Establish a swap line of up to $200 million with the EBRD to provide lari liquidity targeted to support companies.

### Financial sector policy and stability measures
- Strengthened banking sector capacity:
  - Increased capital requirements in line with Basel III including Pillar 2 and systemic buffers.
  - Improved quality of capital by gradually increasing CET-1 and Tier-1 requirements.
  - Enhanced liquidity framework with LCR and NSFR requirements.
  - Introduced responsible consumer lending regulation.
  - Refining resolution framework approved in parliament in December 2020.
- COVID-19 response measures by NBG:
  - Allow banks to utilize capital conservation buffers (automatic prohibition on dividends and other payouts).
  - Postpone previously planned increases in capital buffers.
  - Communicated ability for banks to go below 100 percent LCR in case of liquidity pressures.
  - Banks asked to evaluate loan portfolio quality; on-site inspections suspended; moratorium on fines where a breach emerged due to the crisis.
- Large exposure limits:
  - Tightened to 25 percent of Tier 1 capital for both related and non-related parties; regulation issued in November 2019.
  - Compliance timeline revised: banks granted until June 2021 to comply; from January 2021, banks should refrain from creating new exposures that breach this limit.
  - Regular collection of additional information from banks on large borrowers and portfolio concentration risk.
- Measures to restore lending to the non-financial private sector:
  - Revising emergency liquidity assistance framework; accept broader collateral for temporary liquidity assistance to solvent financial institutions.
  - Potential measures include credit guarantees provided by government, liquidity support for banks, interest rate subsidies, loan guarantees, and supervisor actions (releasing capital and liquidity buffers).
- Ministry of Finance liquidity injection:
  - Issue debt securities up to GEL600 million, 1.2 percent of GDP, to inject GEL liquidity into the banking system; proceeds placed as long-term deposits in banks proportionally to amounts each bank purchased; banks can use these securities as collateral for secured funding with the NBG.
- Contingency and backstop funding:
  - Consider increasing the limit for insured deposits and obtaining additional funding for the deposit insurance and the banking resolution funds.
- Adjusted plans for regulatory and supervisory strengthening:
  - Banks requested to fully transfer financial and regulatory reporting to IFRS by the end of 2021 (rather than end-December 2020); voluntary adoption possible from end-December 2020.
  - Once on IFRS, request capital adequacy information on stand-alone and consolidated basis under IFRS with relevant prudential filters.
  - Revised consumer lending regulation: reinforced principle-based nature, greater flexibility, reduced number of income brackets for PTI, extended local currency mortgage maturities, and more robust risk governance requirements.
  - Draft law on supplementary supervision for financial conglomerates to be submitted to Parliament by December 2020.
  - Approved standards for interest rate risk in the banking book in March 2020—effective from September 2020.
  - Commit to publishing Financial Stability Reports annually (first published in 2019).
- Strengthening banking resolution framework:
  - Parliament enacted legislation to enhance banking crisis management, clarify authorities’ roles, and grant NBG a clearer resolution mandate.
  - Legislation prohibits unsecured lending by the NBG, mandates a penalty rate for emergency liquidity assistance (ELA), and clarifies MoF role in systemic ELA framework.
  - Preparing secondary legislation on (end-June 2020 structural benchmark): (i) NBG’s Resolution Committee and the inter-agency Financial Stability Committee; (ii) identification of critical functions; (iii) recovery plans; (iv) valuation; and (v) accelerated supervisory approvals during resolution.
  - Intend to issue secondary legislation on (end-December 2020 structural benchmark): (i) resolution plans; (ii) temporary administrator and special manager; (iii) recapitalization tools, including bail-in; (iv) bridge bank tool; (v) temporary public support and ex-post resolution fund; and (vi) ELA against government guarantees.

### Capital market development and larization
- Steps to develop local capital markets:
  - Submitted to Parliament legislation establishing investment funds and related changes to the tax code.
  - Submitted amendments to securities market legislation to improve investor rights protection and corporate transparency; target approximation to EU directives/regulations under DCFTA.
  - During 2020, plan to strengthen regulatory framework for investment funds, funded-pension operations, market abuse and transparency, business conduct and custody.
  - Law on derivatives and financial collateral enacted at end of 2019; will submit legislation to Parliament for securities holding aligned with international best practices by June 2020 (introduce indirect holding regime where only banks and brokers authorized to hold securities on behalf of clients).
  - In 2020, plan to submit legislation for (i) securities holding (basis for dematerialized securities holding) and (ii) covered bonds to improve access to long-term lari funding and develop fixed-income market.
  - In 2020, plan to finalize diagnostics/feasibility study for securitization and inflation-linked debt securities.
- Transition to a primary-dealer (PD) system (in consultation with IMF):
  - Update regulation to allow introduction of a PD system by end-September 2020, including: (i) primary market regulation issued jointly by the MoF and NBG; (ii) a core PD arrangement (agreement or Memorandum of Understanding); (iii) contractual agreements for financial transactions in public debt securities; and (iv) market conduct regulation to ensure segregation between PDs own-trading and clients’ order collection.
  - Implement PD system starting with a pilot intermediate market making arrangement (IMMA) focused on a key benchmark tenor; request financial institutions’ expressions of interest and plan to launch IMMA by September 2020.
  - Assess the IMMA within 12 months of launch to adjust and gradually extend the system.

### Structural reforms to support recovery and inclusive growth
- Continue implementation of comprehensive structural reform agenda focused on:
  - Strengthening connectivity through infrastructure spending and trade initiatives.
  - Improving education and vocational training.
  - Mobilizing savings, improving the business environment, and land and energy reforms.
  - Targeted social assistance and healthcare to protect the most vulnerable.
- Enhancing connectivity:
  - Advance investment in core infrastructure to transform Georgia into a transport and logistics hub connecting Europe with Asia.
  - Signed all remaining contracts required for construction of the East-West highway and began construction on the critical section of the North-South corridor.
- Education reform:
  - Revise government decree on teachers’ regulatory documents to clarify teachers’ roles and responsibilities at four categories (Practitioner, Senior, Lead and Mentor).
  - Establish a non-discretionary approach to teacher career advancement by: (i) abolishing credit-point (incl. partial) accumulation system; and (ii) introducing special exams for teacher promotion at each level of teacher status (currently exams are only for practitioners).
- Funded pension pillar:
  - Pension agency appointed a chief investment officer and is designing the investment strategy.
  - Interim placement of pension contributions in bank deposits and certificates of deposit.
  - March: Parliament adopted amendments to the Law on Pension Savings clarifying requirements for custodian institutions.
  - A fully functioning pension agency with safeguards will promote savings and create an institutional investor for long-term lari assets.

*IMF staff summary of Georgia policy commitments and reforms as presented in the source content.*

### 39. We will continue to improve the business environment. To improve corporate

### 39. We will continue to improve the business environment. To improve corporate

### Corporate governance and insolvency reform
- Corporations will gradually be required to publish audited financial statements based on IFRS standards.
- In March 2020, a draft insolvency law was submitted to Parliament to provide adequate protection of creditor rights, timely and efficient insolvency processes and effective rehabilitation framework in line with best international standards.
- The insolvency law is described as critical to deal with the aftermath of the COVID-19 shock.
- Structural benchmark: finalize the framework for insolvency professionals and begin licensing professionals by end-December 2020. (end-December 2020 structural benchmark)
- Starting January 2020, regulatory impact assessments began to be applied to policy decisions to protect the economy from undue costs.

### Land registration and rural/agricultural development
- Land cadasters are emphasized for protecting property rights, simplifying land transactions, and providing collateral for borrowing.
- Assistance is being provided to citizens to search for property ownership documents and to facilitate dispute resolution through mediation.
- Registered land plots currently amount to 2.1 million compared to 0.6 million that were registered within the land reform launched on August 1, 2016.

### Trade policy and free trade agreements
- Deepening trade relations with the rest of the world is a key priority.
- A free trade agreement with the UK has been signed to continue trade relations after its departure from the EU.
- A feasibility study for a free trade agreement (FTA) with India has been finalized.
- Negotiations continue with Turkey to expand the current FTA.
- The government remains committed to pursue other FTAs with priority countries, including the United States, Israel, and the Gulf Cooperation Council countries.

### Energy reform strategy
- Objectives: increase market competition, promote renewable energy, and enhance energy efficiency.
- Electricity and gas markets will be developed based on the EU energy market principles.
- For the largest electricity consumers (accounting for around 30 percent of electricity consumption) a third-party access model has been implemented, separating transmission and distribution from suppliers, traders and generators, expected to:
  - foster wholesale competition,
  - promote cross-border trading capacity,
  - open the sector to private investment in renewable energy.
- The natural gas sector will be gradually deregulated in parallel.
- The government will adopt a new Electricity Market Concept Design to design new market rules; the same procedure will be carried out for the natural gas sector as defined by the law on Energy and Water Supply.
- Energy savings, independence, security in energy supply, and energy efficiency will continue to be promoted.
- Development of a national energy efficiency target and an energy efficiency obligation scheme and/or alternative policy measures for energy savings is underway.
- The Parliament of Georgia is expected to adopt the new laws on energy efficiency and on energy performance in buildings in May 2020.

### National accounts modernization
- Plans to further improve national accounts series in 2020 by:
  - computing GDP based on supply and use tables,
  - computing quarterly GDP by expenditure at constant prices.
- Purpose: provide a more detailed picture of the structural transformation in the economy.

### Program monitoring, safeguards, and reporting
- Program monitored through quantitative performance criteria, indicative targets, an inflation consultation clause and structural benchmarks; semi-annual reviews based on June and December test dates.
- The Technical Memorandum of Understanding (TMU) defines variables subject to quantitative targets and reporting requirements.
- The NBG maintains a strong safeguard framework and internal controls environment; independent external audit firms continue to be engaged to audit the NBG in accordance with international standards.
- Where part of Fund financing will be used for direct budget support, the NBG and the Ministry of Finance will sign and provide the IMF with a Memorandum of Understanding clarifying responsibilities for timely servicing of related financial obligations to the IMF.
- Fund disbursements to be used for budget financing will be deposited into the government’s account at the NBG.

### Selected quantitative and timetable details from program documents
- Regulatory start date for applying regulatory impact assessments: Starting January 2020.
- Insolvency professionals licensing benchmark: begin licensing by end-December 2020. (end-December 2020 structural benchmark)
- Registered land plots: 2.1 million; previously registered within the August 1, 2016 land reform: 0.6 million.
- Largest electricity consumers account for around 30 percent of electricity consumption.
- Parliament expected to adopt new laws on energy efficiency and on energy performance in buildings in May 2020.
- National Bank of Georgia (NBG) net international reserves (NIR) end-period stock (million of U.S. dollars) reported in program tables: 1,490 1,507 1,552 Met 1,450 1,120 1,100.
- Program exchange rates listed in the TMU (Currency/US$): SDR 0.7439; GEL 2.6468; AUD 0.7227; CAD 0.7419; EUR 1.0556.
- General government budget benchmark: adopt a budget for 2020 with an augmented deficit of GEL1,320 million in line with policies agreed at the Fifth Review (End-December 2019, Met).
- Upcoming structural benchmarks (as listed): Adopt the first phase of secondary legislation implementing bank resolution framework End-June 2020; Introduce the regulatory framework for insolvency professionals and begin licensing End-December 2020; Adopt the second phase of secondary legislation implementing bank resolution framework End-December 2020.
- Proposed new structural benchmarks include: Expand the 2020 Fiscal Risk Statement in line with recent FAD TA recommendations End-December 2020; Adopting a 2021 budget consistent with the policies agreed at the Seventh Review End-December 2020.

*Source: IMF staff and Georgian authorities, as presented in the provided IMF program documents.*

### 10.      Definition: The augmented cash balance of the general government is defined as:

### 10.      Definition: The augmented cash balance of the general government is defined as:

### Definition and measurement
- Augmented cash balance of the general government = revenues minus expense, minus net acquisition of non-financial assets (as defined by GFSM 2001) minus net budget lending (as defined below).
- A negative augmented cash balance is a deficit.
- Measurement (financing side): measured at current exchange rates established by the NBG at the date of the transaction.
- Augmented cash deficit of the general government is measured by:
  - i) net acquisition of financial assets (including changes in balances of the revenue reserve account), excluding net budget lending as defined by GFSM 2001; minus
  - ii) net incurrence in domestic and foreign liabilities as defined in GFSM 2001.

### Adjustors to the ceiling on the augmented cash deficit (Table 2)
- Adjustor: Adjust ceiling upward (higher deficit)/downward (lower deficit) by the cumulative total amount of foreign-financed project loan disbursements above/below the program amounts (Table 2).
- Adjustor: Adjust ceiling downward (lower deficit) by the cumulative amount of receipts from sale of non-financial assets above the program amounts (Table 2).
- Adjustor: Adjust ceiling upward (higher deficit)/downward (lower deficit) by the cumulative amount of VAT credits refunded in cash above/below the program amounts (Table 2).
- Adjustor: Adjust ceiling on net budget lending upward (higher deficit)/downward (lower deficit) by the cumulative total amount of on-lent amounts from foreign-financed project loan disbursements above/below the program amounts (Table 2).
- Adjustor: Adjust ceilings on the augmented cash deficit and the primary current spending (indicative target) upward (higher deficit and higher primary current spending) for healthcare costs related to prevent the COVID-19 spread and treating COVID-19 cases in excess of the originally planned amount of GEL351 million (Table 2).
  - Activities included for the adjustor are defined by:
    - Government Decree #164 28.01.2020 “On approval of preventive measures against spread of Novel Coronavirus and operational plan on treating diseases caused by the Novel Coronavirus”: Article 4.1 – Activities under the competencies of NCDC and Center for coordinating Emergency situation; Article 4.8 – Tourism Agency providing quarantine services, including renting hotels and providing catering for the people in quarantine.
    - Annex #20 “Managing Novel COVID-19” of the Government Decree #674 31.12.2019 “On Approving 2020 Healthcare Programs”, added to the decree by the Government decree #176 17.03.2020.
    - Government Decree #653 25.12.2019 “On approving 2020 State Program of Rehabilitating and equipping Medical Facilities”.

### Table 2 — Projected financing for cash deficit of the general government (in millions of GEL, cumulative from the beginning of the calendar year)
- June 30, 2020 / December 31, 2020:
  - Healthcare costs related to prevent the COVID-19 spread and treating COVID-19 cases: N/A / 351
  - Disbursements of foreign-financed project loans1: 627 / 2,040
  - Receipts from sale of non-financial assets: 83 / 150
  - VAT refunds: 300 / 600
  - On-lent amounts from project loan disbursements: 80 / 250
- Footnote 1: Adjustments will not be made on project loans that are used to support the budget and/or the healthcare sector, namely, the World Bank’s Fast Track COVID-19 Facility and EIB’s healthcare project.

### Supporting material and reporting requirements (monitoring data)
- Data on domestic bank and nonbank financing will be provided to the IMF by the NBG and the Treasury Department of the Ministry of Finance within four weeks after the end of each month.
- Data on external project financing as well as other external borrowing will be provided to the IMF monthly by the Ministry of Finance (specifying projects by creditor) within two weeks of the end of each month.
- Healthcare spending specified under:
  - (i) Government Decree #164 28.01.2020 (Articles 4 and 4.8 and Annex #20); and
  - (ii) Government Decree #653 25.12.2019 “On approving 2020 State Program of Rehabilitating and equipping Medical Facilities”.
- Data will be provided at actual exchange rates.
- Data on receipts from sales of non-financial and financial assets of the general government will be provided by the Treasury Department of the Ministry of Finance to the IMF on a monthly basis within two weeks of the end of each month.
- Data on securitized debt sold by the NBG, including the securities that have been purchased by nonbanks, will be reported by the NBG to the IMF on a monthly basis within two weeks of the end of each month.
- Data for the previous month will be provided by the Georgia Revenue Service by the end of each month on:
  - Number and GEL value of claims for cash refunds submitted by taxpayers, separately for VAT and other taxes,
  - Number and GEL value of cash refunds paid, separately for VAT and other taxes,
  - Number and GEL value of cash refunds paid automatically (i.e., without manual check or audit), separately for VAT and other taxes.

### Net budget lending, primary current expenditures, VAT refund stock — definitions and reporting
- Net budget lending: Consistent with GFSM 2001, net budget lending is defined as the net acquisition of financial assets for policy purposes by the general government.
- Primary current expenditures: Defined as expense (as defined by GFSM 2001) on a cash basis, minus interest payments.
- Supporting material: Data for monitoring expenditures will come from the accounts of the general government covered under the ceiling on the augmented cash deficit (including autonomous regions). The Ministry of Finance is responsible for providing reporting. Data on expense and net acquisition of non-financial assets of the general government should be reported to the IMF within four weeks after the end of the quarter.
- VAT credit refunds reporting (period from the 16th day of the previous month to the 15th day of the current month) to be provided by the Georgia Revenue Service by the end of each month on:
  - Opening balance in taxpayer accounts (stock),
  - New tax credits declared by taxpayers,
  - Tax credit balance adjustments made by GRS after desk check / audit and by taxpayers,
  - Tax payments to the budget,
  - Tax credits offset against tax liabilities,
  - Tax credit refunds paid in cash,
  - Other flows (residual),
  - Closing balance in taxpayer accounts (stock),
  - Closing balance amounts not eligible for a cash refund (stock).

### Continuous performance and ceilings (external payment arrears, domestic arrears, guarantees)
- External debt / arrears:
  - Debt defined as set forth in point No. 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 15688-(14/107) adopted on December 5, 2014). External debt is defined by the residency of the creditor.
  - External payment arrears: all overdue debt service obligations (principal or interest, considering contractual grace periods) arising in respect of any debt contracted or guaranteed or assumed by the central government, or the NBG, or any agency acting on behalf of the general government.
  - Ceiling on new external payments arrears applies continuously; it shall not apply to external payments arrears arising from external debt being renegotiated with external creditors where a creditor has agreed that no payment needs to be made pending negotiations.
  - Supporting material: accounting of non-reschedulable external arrears by creditor (if any), with detailed explanations, transmitted monthly within two weeks of the end of each month.
- Domestic expenditure arrears:
  - Defined as non-disputed payment obligations whose execution term has expired and became overdue. Arrears arise from non-debt liabilities not paid after 60 days of the contractual payment date (or after 60 days of the receivable if no contractual date). Any wage, pension or other entitlement not paid after a 30-day period from the due date is in arrears.
  - Supporting material: accounting of new domestic expenditure arrears (if any) transmitted within four weeks after the end of each month.
- New guarantees issued by the public sector:
  - Definition: a guarantee of a debt arises from any explicit legal obligation of the public sector to service such a debt in the event of nonpayment by the recipient (payments in cash or in kind).
  - Supporting material: Ministry of Finance will provide information on any new guarantees issued by the public sector within 4 weeks after the end of each quarter.

### Partnership Fund ceilings and definitions
- Ceiling on the cash deficit of the Partnership Fund:
  - Cash deficit = expenditures minus revenues.
  - Revenues: dividends from assets and investments, interest earnings from loans, fees for services and guarantees, and any other income from assets.
  - Expenditures: all current and capital expenditures.
    - Current expenditures: compensation of employees, purchase of goods and services, transfers to other entities, other account payables and domestic and external interest payments.
    - Capital expenditures: net acquisition of nonfinancial assets as defined under GFSM 2001.
  - Purchase of financial assets (e.g., lending and equity participation) not considered part of expenditures.
- Ceiling on new net borrowing by the Partnership Fund:
  - Net borrowing = contracted debt liabilities minus principal repayments.
  - Supporting material: Ministry of Finance to provide detailed quarterly information on revenue, expenditure, new contracted debt and principal repayments within four weeks of the end of each quarter.
- Continuous ceiling on new investments by the Partnership Fund:
  - New investments = gross acquisition of non-financial and financial assets, excluding (i) currency and deposits and (ii) other accounts receivables. Excludes transactions required by contractual obligations established before November 1, 2019.
  - Supporting material: Ministry of Finance to provide detailed quarterly acquisition information within four weeks of the end of each quarter. Ministry to notify IMF about transactions required by preexisting contractual obligations within 10 days of their occurrence and provide documentation.

### Net International Reserves (NIR) of the NBG — definition, stock, and adjustors
- Definition: NIR in U.S. dollars = foreign assets of the NBG minus the sum of foreign liabilities of the NBG, including all of Georgia’s liabilities to the IMF.
  - Foreign assets include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and the reserve position in the IMF.
  - Gross foreign exchange reserves: liquid, convertible currency claims of the NBG on nonresidents, including cash holdings of foreign exchange that are readily available.
  - Pledged or otherwise encumbered assets (including assets used as collateral or guarantee for third party external liabilities) are excluded from foreign assets.
  - Foreign liabilities of the NBG: sum of Georgia’s outstanding liabilities to the IMF (at face value), Georgia’s SDR allocation, and any other liabilities of the NBG (including foreign currency deposits of financial institutions at the NBG and currency swaps and foreign exchange forward contracts with financial institutions), excluding the foreign exchange balances in the government’s account with the NBG.
  - For program monitoring, stock of foreign assets and foreign liabilities valued at program exchange rates as described in paragraph 2 above.
- Stock example: The stock of NIR amounted to $1,552 million as of December 31, 2019 (at program exchange rates).
- Budget support definitions:
  - Budget support grants: grants received by the general government for direct budget support from external donors and not related to project financing.
  - Budget support loans: disbursements of commercial loans and loans from bilateral and multilateral donors for budget support.
- Adjustors to the floor on NIR:
  - Upward (downward) by any excess (shortfall) of FX privatization revenue in foreign exchange above (below) programmed amounts.
  - Upward (downward) by any excess (shortfall) of budget support grants compared to program amounts (Table 3).
  - Downward by any shortfall of budget support loans compared to program amounts (Table 3).
  - Upward by the sum of the total excess of budget support loans compared to program amounts (Table 3) and any negative net Eurobond issuance by the government, if this sum is positive.
  - Upward by any positive net Eurobond issuance by the government.
  - Upward/downward by 100 percent for any excess/shortfall related to disbursements of the project loans and grants to the treasury single account at the NBG relative to the projected amounts (Table 3).

### Table 3 — Projected balance of payment support financing (millions of U.S. dollars)
- June 30, 2020 (cumulative from January 2020 to end-June 2020) / December 31, 2020 (cumulative from January 2020 to end-December 2020):
  - Projected privatization revenue: 0.0 / 0.0
  - Budget support grants from external donors and not related to project financing: 0.0 / 91.2
  - Budget support loans, including bilateral and multilateral donors for budget support: 297.8 / 1,278.1
  - Disbursements of project loans and grants: 75.9 / 225.2
- Note: Flows are valued at program exchange rates for the June and December targets.

*Source: 1geoea2020001 - 10.      Definition: The augmented cash balance of the general government is defined as:*

### 38.      Supporting material: Data on net international reserves (both at actual and program

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1geoea2020001.pdf_