## 1geoea2020006

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### Executive summary — context, program status, and policy stance
- Context and outlook:
  - Georgia’s economy faces a pronounced slowdown; staff projects the economy to shrink by 5.1 percent in 2020 followed by a gradual recovery.
- Program status:
  - The EFF arrangement is broadly on track.
  - All end-June 2020 quantitative performance criteria and the structural benchmark for the Seventh Review have been met.
  - Completion of the Seventh Review will make SDR79 million (about $112.1 million) available, bringing total disbursements under the EFF to SDR406 million (about $576.4 million).
- Program policies and stance:
  - Fiscal:
    - 2021 Budget implies a mild contractionary fiscal stance.
    - Fiscal support to households and businesses remains in place.
    - Fiscal rule: fiscal deficit to reach 3 percent of GDP by 2023 and public debt to remain below 60 percent of GDP.
  - Monetary and exchange rate:
    - Monetary policy should maintain a moderately tight bias to anchor inflation expectations amid a depreciating lari.
    - Exchange rate flexibility used as a shock absorber; excessive volatility would harm financial stability.
  - Financial sector:
    - Proactive monitoring and preserving banks’ capital resources until recovery is clear.
  - Structural reforms:
    - Priority reforms: advancing education reform, implementing the new insolvency framework, developing the local capital market, and judiciary reforms.

### Recent developments and key indicators
- COVID-19 and containment:
  - Stringent measures in Q2; by mid-June businesses reopened and flights resumed to limited countries.
  - New lockdown in retail and hospitality for December 2020 and January 2021 due to surge in cases.
- Output and inflation:
  - Preliminary: real GDP contracted by 5.6 percent (y-o-y) in 2020H1.
  - Q3 rebound but below 2019Q3 level (–3.8 percent, y-o-y) (flash estimate).
  - Inflation: 6.9 percent (y-o-y) peak in April; declined to 3.8 percent (y-o-y) in October.
- External sector:
  - Current account deficit widened to 10.5 percent of GDP in H1 2020.
  - Trade deficit narrowed by 12 percent y-o-y as imports decreased more than exports.
  - Net remittances increased by 6.3 percent (y-o-y) in first nine months of 2020.
  - FDI declined to 3.9 percent of GDP in H1 2020 (-38 percent y-o-y).
  - Financial account balance deteriorated to 3.1 percent of GDP in H1 2020.
- Exchange rate:
  - Lari depreciated 5.1 (5.4) percent in nominal (real) effective terms from February to October.
  - Depreciation pattern: initial Feb–May: 5.7 (4.7) percent nominal (real); May–end-August rebound 2.9 (0.6) percent nominal (real); resumed depreciation thereafter.
- Fiscal execution (selected):
  - Cumulated augmented fiscal deficit: GEL1,492 million (3 percent of GDP) by end-June, below program ceiling GEL2,300 million.
  - End-September augmented deficit widened to 6 percent of GDP; revenues dropped by 1.5 percent of GDP and current spending increased by 3.1 percent of GDP y-o-y.
  - End-September government deposits: 5.3 percent of GDP.
- Monetary and banking:
  - NBG lowered policy rate three times by cumulative 100 bps since reopening; rates on hold since September.
  - Credit growth (constant exchange rates) slowed to 12 percent in September (y/y) from 18 percent in February.
  - Non-performing loans: 2.3 percent in 2020Q3.
  - Loan dollarization: 57.5 percent (end-September); deposit dollarization: 61.6 percent (end-September).
  - System-wide regulatory capital ratios declined marginally below end-2019 levels; retained earnings supported capital.

### Fiscal COVID-19 support and deployment
- End-June supplementary budget: 4.3 percent of GDP in temporary and targeted measures:
  - Health-related spending: 1.0 percent of GDP.
  - Transfers to vulnerable households: 1.6 percent of GDP.
  - Support to SMEs and hard-hit businesses: 1.7 percent of GDP.
- Jan–Sep actual vs. projected:
  - Actual (Jan-Sep): GEL581 mls; Projected 2020: GEL1,961 mls; 3.9 percent of GDP.
  - Revenue measures: Actual = GEL261 mls; Projected = GEL773 mls; 0.7 percent of GDP.
  - Expenditure measures: Actual = GEL877 mls; Projected = GEL1,541 mls; 3.2 percent of GDP.
  - Capital expenditure: Actual Jan–Sep = GEL48 mls; Projected 2020 = GEL179 mls; 0.2 percent of GDP.
  - Support to agriculture: Actual Jan–Sep = GEL40 mls; Projected 2020 = GEL80 mls; 0.1 percent of GDP.
  - Grants: Actual Jan–Sep = GEL74 mls; Projected 2020 = GEL166 mls; 0.3 percent of GDP.
- Specific measures:
  - Direct transfers, income tax relief for retaining workers, property tax waiver for tourism, redesigned credit guarantee scheme, interest rate subsidies to small hotels, mortgage subsidies for new lari-denominated mortgages below GEL200,000, agriculture co-financing, microgrants.
- August reallocation: GEL410 million (0.8 percent of GDP) redirected to one-time child transfer (GEL200), university tuition assistance, extended utility subsidies, additional transfers to self-employed.
- December lockdown measures: one-time transfer GEL300 to eligible job losers (~100,000 people), estimated cost GEL30 million; projected revenue loss GEL90 million.

### Numerical fiscal execution highlights (selected exact figures)
- Revenues and grants: 2019 = 9,460; 2020 = 8,702; Difference = -758; Difference = -1.5 percent of GDP.
- Taxes: 2019 = 8,432; 2020 = 7,805; Difference = -626; Difference = -1.2 percent of GDP.
- VAT refunds: 2019 = -424; 2020 = -629; Difference = -205; Difference = -0.4 percent of GDP.
- Grants: 2019 = 276; 2020 = 83; Difference = -193; Difference = -0.4 percent of GDP.
- Primary current spending: 2019 = 7,089; 2020 = 8,614; Difference = 1,525; Difference = 3.1 percent of GDP.
  - Covid-19 fiscal measures in 2020: 0 in 2019; 1,092 in 2020; 1,092 = 2.2 percent of GDP.
- Interest expense: 2019 = 460; 2020 = 542; Difference = 82; Difference = 0.2 percent of GDP.
- Net acquisition of non-financial assets: 2019 = 2,292; 2020 = 2,554; Difference = 262; Difference = 0.5 percent of GDP.
- Capital spending: 2019 = 2,428; 2020 = 2,692; Difference = 264; Difference = 0.5 percent of GDP.
- Privatization: 2019 = 137; 2020 = 138; Difference = 1; Difference = 0.0 percent of GDP.
- Net budget lending: 2019 = 93; 2020 = 36; Difference = -57; Difference = -0.1 percent of GDP.
- Augmented deficit: 2019 = 476; 2020 = 3,024; Difference = 2,548; Difference = 5.1 percent of GDP.

### FX interventions, reserves, and external financing
- NBG FX sales and reserves:
  - Net international reserves (NIR) at program rates: $1,335 million (end-June), $370 million above adjusted target ($966 million).
  - Gross international reserves (GIR) peaked at $3.9 billion (end-August 2020), declined to $3.7 billion (end-October) as NBG increased FX sales since September.
  - As of November 30, NBG cumulatively sold about $866.5 million in 2020.
  - Figure text note: NBG sales in 2020 amounted to USD 777 million; total interventions around USD 820 million including USD 42.9 million via Bloomberg-match system.
  - End-December 2020 NIR floor: $1.1 billion.
  - GIR expected to reach 105 percent of the ARA metric end-2020.
- Balance-of-payments and projections:
  - Staff projects BOP gaps of $1.3 billion in 2020 and $0.8 billion in 2021.
  - Current account deficit expected to widen to 9.8 percent of GDP in 2020 (from 5.4 percent in 2019).
  - Tourism revenues in 2021 projected at 25 percent of 2019 level; current account deficit in 2021 projected at 8.5 percent of GDP.
  - Financial account projected to deteriorate by 3.2 percent of GDP to 2.6 percent of GDP in 2020.
  - BOP gaps to be closed with IMF and donor financing.

### Financial sector resilience, risks, and policy guidance
- Banking system starting positions:
  - Aggregate CET1 capital ratio: 13.4 percent (pre-pandemic).
  - Total capital ratio: close to 20 percent (pre-pandemic).
  - Liquidity coverage ratio (LCR): 120 percent (pre-pandemic).
- Credit risks and dollarization:
  - FX-denominated loans: 56 percent of loans.
  - Only 10 percent of FX borrowers have a natural hedge.
  - 63 percent of deposits denominated in foreign currency (aggregate).
  - Loan dollarization and deposit shifts during depreciation risk increasing lari funding gap.
- Stress testing and provisioning:
  - NBG’s assessment (shock: 5 percent contraction, sectoral shocks, 3-year recovery) resulted in GEL1.1 billion provisions booked as general provision in March.
  - Provisioning almost doubles to reach 7 percent of loan portfolio.
  - System-wide CET depletion rate: 320 basis points.
  - All banks remain above minimum requirements though most would have to use capital buffers.
  - Restructured loans: 13 percent (all-time high since 2012).
- Policy guidance:
  - Preserve banks’ capital resources until recovery is clear; avoid premature re-introduction of higher capital requirements.
  - Restrict dividend distributions before full restoration of capital buffers; communicate timeline for rebuilding buffers.
  - Finalize regulatory changes to the banking resolution framework (NBG expected to finalize by end-December 2020).

### Structural reforms and medium-term growth
- Growth projections:
  - Growth in 2020 projected to contract by 5.1 percent.
  - Staff projects growth to rebound to 4.3 percent in 2021 under gradual fade of the pandemic.
  - Medium-term growth expected to reach 5¼ percent by 2025.
  - By 2025, real GDP estimated to be about 8 percent below pre-pandemic projections.
  - Gross external debt projected to decline and reach 90 percent of GDP by 2025.
- Structural priorities:
  - Infrastructure: East-West Highway — two of four sections near completion; remaining sections under construction.
  - Education: revise teachers’ regulatory documents; establish non-discretionary career advancement.
  - Business environment: modernized labor code; insolvency legislation adopted in September; licensing delayed to 2021Q1.
  - Energy: legislation on energy efficiency adopted May 2020; Electricity Market Concept Design applicable to natural gas by end-2021.
  - National accounts: quarterly GDP at constant prices published; balanced SUT for 2019 planned by end-2020.

### Public debt, financing, and program monitoring
- Public debt and financing:
  - Public debt (net of government deposits) projected at 59.1 percent of GDP in 2021 due to higher borrowing and lari depreciation.
  - Capacity to repay Fund: full drawing implies repayments to IMF at 0.5 percent of GDP or 2.4 percent of GIR in 2025.
  - Program financing assurances in place for next 12 months; remaining BOP needs to be filled by other multilateral and bilateral creditors.
- Selected program quantitative targets and outcomes (selected exact figures):
  - Ceiling on augmented general government deficit (program definition): Target: 2,300; Adjusted Target: 2,507; Outturn (End-June): 1,492; Status: Met; End-December Target: 4,300.
  - Floor on NIR (end-period stock, million of U.S. dollars): Target: 1,120; Adjusted Target: 966; Outturn (End-June): 1,335; Status: Met; End-December Target: 1,100.
  - Ceiling on accumulation of external debt arrears (continuous criterion, million of U.S. dollars): Target: 0; Adjusted Target: 0; Outturn: 0; Status: Met.
  - Indicative target — Ceiling on Primary Current Expenditures (mn lari): Target: 6,000; Outturn (End-June): 5,482; Status: Met; End-December Target: 12,450.
  - Stock of VAT credits (evaluated mid-June/mid-December): Target: 1,470; Outturn (End-June): 1,303; Status: Met.
  - NIR program exchange-rate basis: GEL/US$ = 2.6468.

### Risk assessment and recommended policy responses (Annex I highlights)
- Conjunctural downside risks:
  - Unexpected adverse shift in pandemic — Likelihood: High; Expected Impact: High.
    - Recommended policy response: utilize fiscal space to extend support, use monetary policy space if inflation expectations anchored, maintain exchange rate flexibility while using FX reserves to prevent disorderly depreciation.
  - Widespread social discontent and political instability — Likelihood: High; Expected Impact: High.
    - Recommended policy response: utilize fiscal space, use monetary policy space if inflation expectations anchored, maintain exchange rate flexibility and use reserves to prevent disorderly depreciation.
- Structural risks:
  - Accelerating de-globalization — Likelihood: High; Expected Impact: Medium.
    - Recommended policy response: allow exchange rate adjustment; use monetary and fiscal policy space to prevent prolonged negative output gap.
- Georgia-specific structural risks:
  - Financial risks (rapid depreciation in a highly dollarized economy) — Likelihood: Medium; Expected Impact: High.
    - Recommended policy response: maintain tight monetary policy to anchor expectations, strengthen resolution framework, adjust macroprudential measures.

### Annex highlights — SOE reform, fiscal risks, and data improvements (Annex II)
- Fiscal Risk Statement (FRS) and PSBS:
  - Public sector net worth: 68 percent of GDP (2018).
  - Public sector assets: 149 percent of GDP.
  - Public sector liabilities: 81 percent of GDP.
  - Public sector net foreign exchange exposure estimated at 50 percent of GDP.
  - Intertemporal net worth (2019, pre-COVID): -35 percent of GDP.
  - PPAs projected government costs average 0.5 percent of GDP annually over 40 years (could double under adverse scenarios).
- SOE sector:
  - Non-financial public corporation assets: ~40 percent of GDP; liabilities similar.
  - Six largest SOEs account for two-thirds of the sector.
  - Sector drew around 6 percent of GDP from the government budget over past five years.
  - Gross financing requirements estimated at 18 percent of GDP over 2020-22.
  - Leverage estimated at 88 percent; recapitalization needed around 7 percent of GDP.
  - Sectorization finalized March 2020: 183 SOEs as general government entities; 52 as public corporations. Expected fiscal impact: deficit +1.4 percent of GDP; debt +0.7 percent of GDP.
- Governance and transparency commitments:
  - Define ownership rationale and long-term strategy by end-March 2021; pilot strategy in selected companies; draft legislation aligned with OECD principles.
  - Refrain from new PPAs until independent technical evaluation supports viability.
  - Transition to IPSAS planned in 2020; aim to produce consolidated audited financial statements.

### Inflation determinants and policy implications (Annex III and Chapter 5)
- Main empirical findings:
  - Forward inflation expectations and changes in the NEER are primary determinants of headline inflation.
  - Short-term dynamics: NEER changes and monetary stance materially affect inflation.
  - Long-run driver: forward inflation expectations.
- Augmented hybrid NKPC estimation (sample January 2012 – December 2019):
  - Observations: 96; Adjusted R-squared: 0.908 (OLS), 0.905 (SUR), 0.898 (CSUR).
  - Key estimated coefficients (preserved exactly as reported):
    - Lag of inflation: OLS: 0.866*** (0.036); SUR: 0.851*** (0.035); CSUR: 0.895*** (0.033).
    - 1-year inflation expectations: OLS: -0.246* (0.126); SUR: -0.266** (0.114); CSUR: 0.105*** (0.034).
    - Output gap: OLS: 0.096 (0.062); SUR: 0.163*** (0.059); CSUR: 0.137** (0.060).
    - Monetary stance: OLS: 0.059** (0.026); SUR: 0.075*** (0.024); CSUR: 0.075*** (0.025).
    - NEER change: OLS: -0.055*** (0.017); SUR: -0.066*** (0.016); CSUR: -0.075*** (0.016).
    - Oil price inflation and other imports price inflation not significant.
  - Interpretation:
    - Active monetary policy can influence short-run inflation; anchoring forward expectations is key for long-run price stability.
    - Administrative one-off price changes can materially affect inflation and should be monitored.

### Staff recommendations — priorities and near-term guidance
- Maintain fiscal support to households and businesses while aligning 2021 Budget to a mild contractionary stance consistent with medium-term anchors.
- Keep monetary policy with a moderately tight bias to anchor inflation expectations amid lari depreciation; allow exchange rate flexibility as first line of defense.
- Proactively monitor financial risks and preserve bank capital resources until recovery is clear; adopt a timeline for rebuilding capital buffers in consultation with financial sector.
- Decisively implement structural reforms to mobilize investment and boost potential growth: education reform, insolvency framework, local capital market development, judiciary reforms.
- Sustain external buffers and reserve adequacy; maintain cautious FX interventions to prevent disorderly depreciation while rebuilding reserves as recovery allows.

*Source: IMF staff report excerpts and Executive Summary for Georgia (1geoea2020006), December 1 and December 16, 2020.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and outlook
- Georgia’s performance under the Extended Arrangement has been positive, but the country is now facing a pronounced economic slowdown.
- Domestic and external demand remain weak, and service sector activity remains sluggish.
- Staff projects the economy to shrink by 5.1 percent this year followed by a gradual recovery.

### Program status
- The EFF arrangement is broadly on track.
- All end-June 2020 quantitative performance criteria and the structural benchmark for the Seventh Review have been met.
- Completion of this review will make SDR79 million (about $112.1 million) available to Georgia, bringing total disbursements under the EFF arrangement to SDR406 million (about $576.4 million).
- The remaining period of this EFF arrangement provides the room for existing commitments to be implemented in the context of continued policy discipline.

### Program policies and policy stance
- Fiscal:
  - The 2021 Budget will imply a mild contractionary fiscal stance.
  - Fiscal support to households and businesses will remain in place to limit the impact of the crisis on the population and support a gradual recovery.
  - Medium-term fiscal plans are anchored by the fiscal rule which calls for the fiscal deficit to reach 3 percent of GDP by 2023 and public debt to remain below 60 percent of GDP.
- Monetary and exchange rate:
  - Monetary policy should maintain its moderately tight bias to keep inflation expectations firmly anchored in the context of a depreciating lari.
  - Exchange rate flexibility allows the lari to work as a shock absorber, but excessive volatility would prove disruptive to financial stability.
- Financial sector:
  - Proactive monitoring of financial risks and actions to preserve banks’ capital resources until the economy is clearly on the rebound would allow the banking system to support the recovery.
- Structural reforms:
  - Decisive implementation of structural reforms is critical to support the recovery and limit scarring from the COVID-19 shock.
  - Priority reforms to mobilize investment and improve the business environment include: advancing education reform, implementing the new insolvency framework, developing the local capital market, and judiciary reforms.

### Recent economic developments — key findings
- COVID-19 and containment:
  - Stringent measures in the second quarter initially kept COVID-19 cases subdued; by mid-June businesses reopened and international flights resumed to a limited number of countries.
  - A surge in COVID-19 cases forced the government to announce a new lockdown in the retail and hospitality sectors for December 2020 and January 2021.
- Output and inflation:
  - Preliminary estimates suggest that real GDP contracted by 5.6 percent (y-o-y) in 2020H1 because of the lockdown and the standstill in tourism.
  - Economic activity rebounded in Q3 but remained below its 2019Q3 level (–3.8 percent, y-o-y) according to flash estimates.
  - Inflation declined to 3.8 percent (y-o-y) in October after peaking at 6.9 percent (y-o-y) in April.
- External sector:
  - The current account deficit widened to 10.5 percent of GDP in the first half of 2020.
  - The trade deficit narrowed by 12 percent y-o-y as imports decreased more than exports.
  - Tourism receipts have dried up since the pandemic hit.
  - Net remittances increased by 6.3 percent (y-o-y) in the first nine months of 2020.
  - The financial account balance deteriorated to 3.1 percent of GDP in the first half of the year.
  - FDI declined to 3.9 percent of GDP over the same period (-38 percent y-o-y).
- Exchange rate:
  - From February to October, the lari depreciated by 5.1 (5.4) percent in nominal (real) effective terms.
  - Depreciation pattern: an initial phase through May depreciated by 5.7 (4.7) percent nominal (real), rebound of 2.9 (0.6) percent nominal (real) between May and end-August, then resumption of depreciation thereafter.
- Fiscal execution and measures:
  - The cumulated augmented fiscal deficit reached GEL1,492 million (3 percent of GDP) by end-June, below the program ceiling of GEL2,300 million.
  - The end-September deficit widened to 6 percent of GDP, as revenues dropped (by 1.5 percent of GDP) and current spending increased (by 3.1 percent of GDP) year-on-year.
  - End-September government deposits amounted to 5.3 percent of GDP.
- Monetary policy and banking:
  - The National Bank of Georgia lowered the policy rate three times by a cumulative 100 bps since the reopening and signaled a cautious easing bias; rates were kept on hold since September given continued exchange rate depreciation.
  - Credit growth (at constant exchange rates) slowed to 12 percent in September (y/y) compared to 18 percent in February.
  - Non-performing loans increased to 2.3 percent in 2020Q3 as the partial moratorium on loan repayments remains in effect.
  - Loan dollarization was 57.5 percent as of end-September (up 2.2 percentage points compared to end-September 2019).
  - Deposit dollarization was 61.6 percent as of end-September (down 2.1 percentage points compared to end-September 2019).
  - System-wide regulatory capital ratios declined marginally below end-2019 levels; retained earnings helped banks to sustain capital levels despite proactive loan provisions.

### Fiscal support and deployment (COVID-19 response)
- End-June supplementary budget envisaged 4.3 percent of GDP in temporary and targeted measures.
  - Breakdown: additional health-related spending (1.0 percent of GDP), transfers targeting vulnerable households (1.6 percent of GDP), support to SMEs and businesses in hard-hit sectors (1.7 percent of GDP).
- As of end-September, about 54 percent of the fiscal support package had been utilized; by end-2020 authorities project disbursements close to 90 percent of the package.
  - Projected composition deviations: higher-than-originally-budgeted social assistance (16 percent) and lower-than-projected support to businesses (26 percent) and healthcare spending (30 percent).
- Specific measures included:
  - Direct transfers to workers who lost income, vulnerable families, severely disabled people, and families with low electricity consumption.
  - Income tax relief for retaining workers; property tax waiver for the tourism sector; redesigned credit guarantee scheme for SMEs and micro enterprises; interest rate subsidies to small hotels; interest-rate subsidy and partial loan guarantee for new lari-denominated mortgages below GEL200,000; support to agriculture (co-financing working capital); microgrants.
- In August, the government redirected social transfers of GEL410 million (0.8 percent of GDP) to:
  - One-time cash transfer per child (GEL200), university tuition assistance to students from vulnerable families, extending utility subsidies for four months, and additional social transfers to the self-employed.
- With the new December lockdown, the authorities announced a one-time transfer of GEL300 for those losing their jobs as a result of closures in the retail sector, restaurants and winter resorts; around 100,000 people are eligible, with an estimated cost of GEL30 million. Authorities also project revenues to lower by GEL90 million as a result of the lockdown.

### Key program-related numerical figures (from execution table and fiscal support)
- Revenues and grants: 2019 = 9,460; 2020 = 8,702; Difference = -758; Difference = -1.5 percent of GDP.
- Taxes: 2019 = 8,432; 2020 = 7,805; Difference = -626; Difference = -1.2 percent of GDP.
- VAT refunds: 2019 = -424; 2020 = -629; Difference = -205; Difference = -0.4 percent of GDP.
- Grants: 2019 = 276; 2020 = 83; Difference = -193; Difference = -0.4 percent of GDP.
- Primary current spending: 2019 = 7,089; 2020 = 8,614; Difference = 1,525; Difference = 3.1 percent of GDP.
  - of which: Covid-19 fiscal measures in 2020 = 0 in 2019; 1,092 in 2020; 1,092 = 2.2 percent of GDP.
- Interest expense: 2019 = 460; 2020 = 542; Difference = 82; Difference = 0.2 percent of GDP.
- Net acquisition of non-financial assets: 2019 = 2,292; 2020 = 2,554; Difference = 262; Difference = 0.5 percent of GDP.
- Capital spending: 2019 = 2,428; 2020 = 2,692; Difference = 264; Difference = 0.5 percent of GDP.
- Privatization: 2019 = 137; 2020 = 138; Difference = 1; Difference = 0.0 percent of GDP.
- Net budget lending: 2019 = 93; 2020 = 36; Difference = -57; Difference = -0.1 percent of GDP.
- Augmented deficit: 2019 = 476; 2020 = 3,024; Difference = 2,548; Difference = 5.1 percent of GDP.
- Total COVID-SUPPORT MEASURES: Actual (Jan-Sep) = GEL581 mls; Projected 2020 = GEL1,961 mls; 3.9 percent of GDP.
  - REVENUE MEASURES: Actual = GEL261 mls; Projected = GEL773 mls; 0.7 percent of GDP.
  - EXPENDITURE MEASURES: Actual = GEL877 mls; Projected = GEL1,541 mls; 3.2 percent of GDP.
  - Capital expenditure (actual Jan-Sep) = GEL48 mls; Projected 2020 = GEL179 mls; 0.2 percent of GDP.
  - Support to agriculture sector (actual Jan-Sep) = GEL40 mls; Projected 2020 = GEL80 mls; 0.1 percent of GDP.
  - Grants (actual Jan-Sep) = GEL74 mls; Projected 2020 = GEL166 mls; 0.3 percent of GDP.

### Staff recommendations / priorities
- Maintain fiscal support to households and businesses while aligning 2021 Budget to a mild contractionary stance consistent with medium-term fiscal anchors.
- Keep monetary policy with a moderately tight bias to anchor inflation expectations amid lari depreciation, while allowing exchange rate flexibility to act as a shock absorber.
- Proactively monitor financial risks and preserve bank capital resources until the recovery is clear to ensure the banking system can support the recovery.
- Decisively implement structural reforms to mobilize investment and boost potential growth, including education reform, the new insolvency framework, local capital market development, and judiciary reforms.

*Source: IMF staff Executive Summary for Georgia, December 1, 2020.*

### 6. The NBG resorted to FX sales to dampen FX

### 6. The NBG resorted to FX sales to dampen FX pressures and anchor inflation expectations.

### FX interventions and international reserves
- After the announcement of the augmentation of the EFF arrangement and additional donor support, the lari stabilized.
- Net international reserves (NIR) at program rates were sustained at $1,335 million as of end-June, $370 million above the adjusted target ($966 million).
- Gross international reserves (GIR) peaked at $3.9 billion at end-August 2020, then declined to $3.7 billion at end-October as the NBG increased FX sales since September to prevent disorderly market conditions and anchor inflation expectations given the strong exchange rate pass-through.
- As of November 30, the NBG has cumulatively sold about $866.5 million in 2020.
- Note in figure text: NBG sales in 2020 amounted to USD 777 million; total interventions by the NBG however is around USD 820 million including USD 42.9 million that the NBG sold via the Bloomberg-match system.
- The end-December 2020 NIR floor is $1.1 billion to reflect the possibility that FX sales may be needed to prevent disorderly market conditions.
- GIR are now expected to reach 105 percent of the ARA metric in end-2020.

### Program implementation and recent actions
- All end-June quantitative performance criteria (QPCs) and the structural benchmark on the first wave of regulatory reforms for the banking resolution framework were met.
- Inflation remained within the inner band of the inflation consultation clause (ICC).
- Parliament approved legislation to index basic public pensions (end-December 2019 SB) in July, and legislation towards a new insolvency framework in September.

### Outlook and risks
- Staff baseline assumptions (consistent with the October 2020 WEO): social distancing will persist into 2021, then fade as vaccine coverage expands and therapies improve, with the acute phase of the pandemic over by end-2022.
- Sectoral effects: contact-intensive sectors (services) will continue to suffer in the near term; manufacturing and agriculture should rebound faster as trading partners re-open.
- Potential scarring effects from labor market dislocations may suppress potential output and demand over the medium term.
- Growth projections and key macro outcomes:
  - Growth in 2020 is projected to contract by 5.1 percent.
  - Inflation is projected at 3.5 percent at end-2020.
  - The output gap is projected to widen slightly to –2.7 percent as potential GDP is expected to decline.
  - Staff projects growth to rebound to 4.3 percent in 2021 under a gradual fade of the pandemic.
  - Medium-term growth is expected to reach 5¼ percent by 2025.
  - By 2025, real GDP is estimated to be about 8 percent below pre-pandemic projections.
  - Gross external debt is projected to decline steadily and reach 90 percent of GDP by 2025.
- Balance-of-payments (BOP) and external financing:
  - Staff projects balance-of-payments gaps of $1.3 billion in 2020 and $0.8 billion in 2021.
  - The current account deficit is expected to widen to 9.8 percent of GDP in 2020 (from 5.4 percent of GDP in 2019) driven mostly by the sudden stop in tourism.
  - Tourism revenues in 2021 are projected at only 25 percent of the 2019 level, with the current account deficit projected at 8.5 percent of GDP.
  - The financial account is projected to deteriorate by 3.2 percent of GDP to 2.6 percent of GDP in 2020, partly mitigated by additional IFI loans.
  - BOP gaps are expected to be closed with IMF and donor financing.
- Risk assessment:
  - Risks are large and mostly to the downside, including prolonged COVID-19 spread, protectionism, protracted slowdown in trading partners, intensified regional conflicts, deterioration in credit quality from restructured loans, exchange rate depreciation, and financial volatility in neighboring countries.
  - Newly announced containment measures pose additional risks to growth.
  - Upside: faster-than-expected vaccine development and distribution could boost confidence and accelerate recovery.

### Authorities’ views
- Authorities highlighted very significant uncertainty owing to the pandemic and the regional conflict.
- Authorities noted recent data point to potential upsides to staff’s projections and broadly agreed with the risk characterization.
- Authorities consider the gradual re-opening of sectors and regions would facilitate recovery.

### Monetary and exchange rate policy assessment
- The gradual pace of monetary easing has been appropriate, but exchange rate pressures may require tightening of the monetary stance to anchor inflation expectations.
- Constraints on monetary easing include strong exchange rate pass-through and high financial dollarization.
- Policy guidance:
  - Exchange rate flexibility should remain the first line of defense to external shocks.
  - A sharp depreciation of the lari would require a combination of policy rate tightening and limited FX interventions to anchor inflation expectations and preserve financial stability.
- Under the baseline, inflation is expected to decline below the 3-percent target in 2021H1 and then gradually converge to it by end-2021; however, high exchange rate pass-through may keep inflation expectations elevated.
- The NBG indicated readiness to tighten monetary policy if exchange rate pressures intensify (e.g., faster-than-expected recovery in private sector demand and a slower pace of fiscal consolidation).

### Fiscal context relevant to exchange rate and reserves
- The fiscal and external policy mix includes fiscal support and planned gradual consolidation that bear on exchange rate dynamics and reserve needs (see broader fiscal projections and policies in the chapter).
- Staff cautioned against a significant drawdown in government deposits given heightened uncertainty and supported the authorities’ plan to refinance the 2021 Eurobond.
- Public debt (net of government deposits) is projected at 59.1 percent of GDP in 2021 due to higher borrowing and lari depreciation.

*Source: IMF staff report excerpts from the chapter "6. The NBG resorted to FX sales to dampen FX pressures and anchor inflation expectations."*

### 22. Maintaining reserves remains critical to sustain macroeconomic and financial stability

### 22. Maintaining reserves remains critical to sustain macroeconomic and financial stability

### External buffers and reserves
- Higher reserves in 2020 and continued donor support help sustain a GIR of 95 percent of the ARA metric in 2021, even as balance of payments pressures are expected to intensify.
- Since COVID-19 related uncertainty is likely to persist well into 2021, it is important to sustain external buffers to provide confidence and safeguard macro and financial stability.
- If external pressures intensify, these buffers could be used further.

### Financial sector policies — monitoring and resilience
- The NBG is actively monitoring risks in the banking sector.
- Banking system starting positions and macroprudential tools:
  - Aggregate CET1 capital ratio was 13.4 percent before the pandemic.
  - Total capital ratio was close to 20 percent before the pandemic.
  - The liquidity coverage ratio (LCR) reached 120 percent before the pandemic.
  - Since end-September 2017 the NBG introduced Liquidity Coverage Ratio (LCR) and since 2019—the Net Stable Funding Ratio (NSFR).
  - Additional Pillar-2 capital requirements used previously: unhedged Currency-Induced Credit Risk (CICR) buffer, credit portfolio concentration buffer (CPCB), and the General Risk Assessment Program (GRAPE) buffer.
  - Other macroprudential instruments enacted include payment-to-income ratio (PTI) and loan-to-value ratio (LTV) requirements.
- Bank support measures and outcomes:
  - Banks’ voluntary loan moratorium and proactive restructuring helped borrowers postpone payments and limit the impact on NPLs.
  - Up to half of loans benefited from grace periods at the outset of the COVID-19, but only 8 percent were in moratoria by October.
  - Restructured loans are at 13 percent (an all-time high since statistics started in 2012).
- Authorities’ stress tests revealed that most banks remain above regulatory capital requirements, though most banks would have to use capital buffers.
- Authorities await the assessment from the ongoing Financial Sector Assessment Program (FSAP) to further improve risk assessment and policy responses.

### Key credit risks and dollarization
- FX-denominated loans constitute 56 percent of loans.
- Only 10 percent of the borrowers in FX have a natural hedge.
- 63 percent of deposits are denominated in foreign currency (aggregate figure; masking variation in individual hedging).
- Lari depreciation may lead to further decline in lari deposits and require the NBG fill the lari funding gap.
- Implementing concentration limits might reduce access to finance for key corporates; domestic capital markets are relatively under-developed and international markets require sizable scale of issuance.

### Capital preservation, normalization, and resolution framework
- Given considerable uncertainty related to the recovery, authorities should consider actions to preserve banks’ capital resources until the economy is clearly recovering to allow banks to support the recovery.
- A premature re-introduction of higher capital requirements may hinder credit to the private sector.
- Before fully restoring capital buffers, banks are restricted from distributing dividends.
- The NBG should clearly communicate the timeline for decisions and the period over which banks would be expected to rebuild capital buffers.
- Resolution framework progress:
  - End-June 2020: NBG adopted secondary legislation on recovery plans, critical functions, valuation of assets and liabilities for resolution purposes, simplified procedures regarding acquisition of significant shares during resolution, and licensing/managing/market exit of a bridge bank.
  - June 2020: NBG, Ministry of Finance, Deposit Guarantee Fund and Insurance State Supervision Service signed charters on the resolution committee and the interagency financial stability committee.
  - NBG expected to finalize regulatory changes to the framework by end-December 2020.

### Box 3 — Assessing COVID-19 shock impact on loan portfolio quality (summary)
- Assessment approach:
  - Detailed assessment checks adequacy of provisioning for the cycle of the shock.
  - Exercise assumes a turnover shock for each industry and a three-year recovery for corporate and SME sectors.
  - Corporate and most retail borrowers assessed individually; NBG assesses provisioning adequacy via portfolio sampling.
  - Corporate/SME ability to service debt assessed using Debt Service Coverage Ratio and Debt-to-EBITDA ratios.
  - Retail portfolio assessment uses updated PTI ratios, days past due, and restructuring status; methodology aims to avoid distortion from loan moratoria while encouraging restructurings for creditworthy borrowers.
- Stress scenario used in assessment:
  - A 5 percent contraction in economic activity and sectoral-specific contractions, followed by a 3-year recovery.
  - Tighter provisioning requirements for retail loans; NBG required banks to consider days past due, loan PTI ratios and restructuring status in determining provisioning after the moratorium expires.
- Main findings and metrics:
  - The assessment resulted in GEL1.1 billion in provisions (booked as a general provision in March).
  - Overall, provisioning almost doubles and reaches 7 percent of the loan portfolio.
  - System-wide CET depletion rate is 320 basis points.
  - All banks would remain above minimum requirements, though most banks would have to use capital buffers.
  - Restructured loans and NPLs are expected to increase.
  - Further delay in tourism recovery may require additional provisioning.
  - Consumer loan quality may deteriorate due to (i) reduced capacity of unhedged borrowers to repay FX loans in the case of further lari depreciation; or (ii) a further increase in unemployment and reduced income due to scarring effects from the COVID-19 shock.
- Recommendations for further analysis:
  - Additional simulations for delayed recovery or a second wave, including potential restrictions on economic activity.
  - Consider risks that government support schemes may expire when designing updated stress test scenarios.
  - Reverse stress testing to estimate how long the crisis would need to last for banks to fall below minimum capital requirements and to prepare for potential capital support measures.

### Structural reforms to boost potential growth
- Infrastructure:
  - Two of four sections of the East-West Highway are about to be completed while construction on remaining sections is underway.
  - Infrastructure spending during the onset of the pandemic contributed to mitigate the impact of the shock and will support the recovery while improving growth potential in the medium-term.
- Education:
  - Authorities plan to revise the government decree on teachers’ regulatory documents to clarify roles and responsibilities in all four categories (Practitioner, Senior, Lead and Mentor) and establish a non-discretionary approach to teachers’ career advancement.
  - Remote teaching progress accelerated with the help of the World Bank; efforts should be sustained, particularly in the regions.
- Business environment:
  - Labor code modernized in line with the Association Agreement with the EU; revamped legislation adopted in September.
  - Insolvency legislation adopted in September; licensing of professionals delayed to 2021Q1.
  - Authorities propose to postpone the end-December 2020 SB to end-March 2021 (reset to end-March 2021 SB).
  - Authorities should further improve the business climate by enhancing efficiency and transparency of the judiciary system.
- Energy:
  - Parliament adopted legislation on energy efficiency and performance in buildings in May 2020.
  - The Electricity Market Concept Design will become applicable for the natural gas sector by end-2021.
  - Energy reform strategy expected to foster a green recovery and promote more competitive pricing.
- National accounts:
  - Authorities started compiling and publishing quarterly GDP at constant prices by expenditure and plan to publish balanced supply and use tables (SUT) for 2019 by end-2020.

### Program issues, financing, and debt sustainability
- Program conditionality updates (understanding reached):
  - Modifications of performance criteria as adjustors on program/project financing were updated to the latest projections; applicable to the fiscal deficit (program definition) and the NIR quantitative performance criteria with no changes to the end-December targets.
  - Postponing the end-December 2020 SB on the insolvency framework to end-March 2021.
- Financing assurances:
  - The program, concluding in April 2021, is fully financed and financing assurances are in place for the next 12 months, with remaining BOP needs to be filled by support from other multilateral and bilateral creditors.
- Capacity to repay the Fund:
  - Georgia’s debt is sustainable but warrants high scrutiny under the Emerging Market Debt Sustainability Analysis given the recent increase in public debt.
  - Total external debt service remains elevated over the medium term, but debt service to the IMF appears to be manageable, even under downside scenarios.
  - The full drawing under the program would imply repayments to the IMF at 0.5 percent of GDP or 2.4 percent of GIR in 2025.
- Risks:
  - Risks to the program remain manageable, assuming continued sound policies.
  - Risks could increase with a worsened external environment or a weaker-than-projected recovery; keeping the program on track may require reformulating the policy mix in consultation with IMF staff.

### Staff appraisal — key judgments and policy guidance
- Pandemic assessment and outlook:
  - Georgia has weathered the initial COVID-19 shock well, but severe challenges remain; the number of cases has been rising recently and the crisis is expected to last longer than at the Sixth Review.
  - Growth in 2020 is now projected to contract 5.1 percent, 1.1 percentage points lower than at the Sixth Review.
  - The recovery is expected to be slower with the output gap closing only by 2023.
  - Estimated balance of payments needs remain broadly unchanged as robust remittances and better financial account balance offset the deterioration in tourism revenues.
- Fiscal policy guidance:
  - Staff supports extending social transfers and providing additional financing to the healthcare sector.
  - Reducing capital spending should leave a fiscal buffer to deploy if downside risks materialize.
  - Strict adherence to the fiscal rule is critical to preserve fiscal credibility given increased public debt and sizeable contingent liabilities.
  - Controlling contingent liabilities requires prompt implementation of the SOE reform.
- Monetary and exchange rate guidance:
  - The NBG should continue efforts to achieve the 3-percent inflation target in the context of a flexible exchange rate regime.
  - Staff supports recent gradual policy rate cuts in line with declining inflation as demand weakened, but scope for further cuts may be limited given resumption of depreciation pressures on the lari.
  - The NBG should continue to use interventions to prevent disorderly market conditions.
- Financial sector guidance:
  - Robust financial supervision helped ensure that the financial system has withstood the shock.
  - Staff welcomes assessment of loan portfolios after moratoria expiration and prompt recognition of losses.
  - Viable, solvent enterprises and households should be supported.
  - Timeline for rebuilding capital buffers should be adopted in consultation with the financial sector and based on indicators such as the outlook for profitability, while ensuring resilience.
  - Continued progress on implementing the bank resolution framework will further strengthen financial resilience.
- Structural reform emphasis:
  - Structural reforms should sustain a durable and inclusive recovery.
  - Implementing the insolvency framework and persevering with comprehensive education reform are important to increase job creation, productivity and wages.

*Source: 22. Maintaining reserves remains critical to sustain macroeconomic and financial stability (1geoea2020006).*

### 39. Staff supports the authorities’ requests for the completion of the Seventh Review,

### 39. Staff supports the authorities’ requests for the completion of the Seventh Review,

### Policy support and program stance
- Staff supports the authorities’ requests for the completion of the Seventh Review, and modification of performance criteria.
- The authorities are committed to deal with the fallout of the pandemic in a way that enhances Georgia’s resilience to future shocks.
- Implementation of the authorities’ policy commitments under the objectives under the EFF program should help lay the foundations for a durable and inclusive recovery.

### Real sector and inflation developments
- Growth contracted sharply in 2020Q2 on the back of stringent containment measures.
- Headline and core inflation picked up during the lockdown before starting to decline.
- The lari continued to depreciate against the dollar and in nominal and real effective terms.
- Nominal GDP per capita is expected to decrease, and unemployment picked up in 2020H1.
- Selected indicator values and trends (from figures and Table 1):
  - Real GDP: 2018: 4.8; 2019: 5.1; 2020: -4.0; 2020 (EFF 6th Review proj.): -5.1; 2021: 4.0; 2022: 4.3; 2023: 5.8; 2024: 5.5; 2025: 5.2.
  - CPI, Period average: 2018: 2.6; 2019: 4.9; 2020: 4.7; 2021: 5.2; 2022: 3.6; 2023: 2.5; 2024: 3.0; 2025: 3.0.
  - CPI, End-of-period: 2018: 1.5; 2019: 7.0; 2020: 3.5; 2021: 3.5; 2022: 3.0; 2023: 3.0; 2024: 3.0; 2025: 3.0.
  - GDP per capita (in thousand of U.S. dollars): 2018: 4.7; 2019: 4.8; 2020: 4.1; 2021: 4.4; 2022: 4.8; 2023: 4.6; 2024: 5.0; 2025: 5.4; 2026: 5.9; 2027: 6.4 (note: Table 1 presents through 2025).

### External sector developments
- The current account is expected to widen in 2020.
- Tourism was almost completely at a standstill in 2020H1; travel receipts by country and the sharp decline in tourism occurred across the board.
- Financial account was relatively stable, driven by private sector net inflows that decreased by less than FDI.
- Exchange rate in 2020Q2 was more stable than expected, supported by donor financing and central bank intervention.
- Reserve coverage projected to be at adequate levels, supported by IMF and donor financing and FX swap lines.
- Selected indicators (Table 2 and Figure 2):
  - Current account balance (in billions of US$): 2018: -1,191; 2019: -957; 2020: -1,714; 2021: -1,588; 2022: -1,326; 2023: -1,444; 2024: -1,182; 2025: -1,239.
  - Current account balance (percent of GDP): 2018: -6.8; 2019: -5.4; 2020: -11.3; 2021: -9.8; 2022: -7.5; 2023: -8.5; 2024: -6.4; 2025: -6.2.
  - Gross international reserves (in millions of US$): 2018: 3,289; 2019: 3,506; 2020: 3,533; 2021 (proj.): 3,642; 2022: 3,578; 2023: 3,440; 2024: 3,659; 2025: 3,866.

### International Investment Position and external debt
- Net IIP remained broadly unchanged in 2019.
- Increases in private sector external debt were offset by NBG’s foreign asset accumulation.
- Total external debt remains elevated, driven by the private sector, and dominated by official creditors.
- Debt service expected to remain elevated over the medium term.
- Selected indicators (Figure 3 and Table 6):
  - Gross external debt (percent of GDP): 2018: 100.3; 2019: 103.4; 2020: 136.3; 2021: 127.0; 2022: 124.1; 2023: 129.0; 2024: 124.4; 2025: 120.9; 2026: 116.2; 2027: 111.6 (Table 1 projections through 2025 shown).
  - External debt (percent of GDP, excl. intercompany loans): 2018: 82.2; 2019: 85.0; 2020: 111.4; 2021: 103.8; 2022: 102.2; 2023: 106.5; 2024: 102.7; 2025: 98.4; 2026: 94.2; 2027: 89.9.
  - Projected composition of external public debt (2020, percent of GDP): IMF: 3.5; World Bank: 12.3; EBRD: 2.0; Other multilaterals: 14.1; Bilateral: 9.3; Eurobond: 3.1; Short-term debt: 0.6.

### Fiscal sector developments
- The augmented fiscal deficit is projected to deteriorate in 2020 as the COVID-19 shock hurts revenues and increases current spending due to support measures to households and businesses.
- Spending cuts concentrated on goods and services, while social benefits were preserved.
- Gross financing needs expected to peak in 2020-21, triggering an increase in public debt which remains highly exposed to FX risks.
- Selected fiscal numbers (Table 3b and Figure 4):
  - Revenue (percent of GDP): 2018: 26.4; 2019: 26.7; 2020: 24.1; 2021 (proj.): 24.9; 2022: 24.7; 2023: 24.9; 2024: 25.5; 2025: 25.9.
  - Total Expenditure (percent of GDP): 2018: 27.2; 2019: 28.5; 2020: 32.3; 2021: 33.7; 2022: 29.1; 2023: 32.3; 2024: 29.2; 2025: 28.2.
  - Net lending / borrowing (GFSM 2001, percent of GDP): 2018: -0.8; 2019: -1.8; 2020: -8.2; 2021: -8.8; 2022: -4.4; 2023: -7.4; 2024: -3.6; 2025: -2.5.
  - Public debt (percent of GDP, Table 1): 2018: 38.4; 2019: 41.2; 2020: 62.8; 2021: 56.3; 2022: 59.1; 2023: 56.9; 2024: 55.0; 2025: 53.3; 2026: 51.9.

### Financial sector developments
- Banks remain liquid and well capitalized.
- Watch loans have increased, but NPLs are likely to remain subdued partly because of the repayment moratoria.
- Loan-to-deposit ratio (at constant exchange rates) started to decline as lari deposits recovered.
- Profitability sharply deteriorated due to loan loss provisions, though it has begun to recover; net interest income declined significantly.
- Banking sector remains highly concentrated.
- Selected financial soundness indicators (Table 5 and Figure 5):
  - Capital to risk-weighted assets (Basel III): Mar 2018: 18.4; Jun 2018: 19.1; Sep 2018: 18.2; Dec 2018: 19.0; Mar 2019: 19.5; Jun 2019: 17.0; Sep 2019: 17.0.
  - Nonperforming to total gross loans (IMF definition): Mar 2018: 2.7; Jun 2018: 3.0; Sep 2018: 2.9; Dec 2018: 2.6; Mar 2019: 1.9; Jun 2019: 2.2; Sep 2019: 2.3.
  - Return on assets (ROA): Mar 2018: 3.0; Jun 2018: 2.4; Sep 2018: 2.1; Dec 2018: 2.4; Mar 2019: 2.5; Jun 2020: -7.1; Sep 2020: -2.4.
  - Deposit dollarization (residents, Table 4 mem. items): 2018: 18.8 percent (non-resident deposit share shown elsewhere); overall deposit dollarization (Table 1): 2018: 63.1; 2019: 64.0; 2020: 62.4; 2021 proj.: 64.1; 2022: 58.4; 2023: 63.4; 2024: 62.7; 2025: 62.0; 2026: 61.4; 2027: 60.8 (Table 1 values).

### Public debt sustainability and scenarios
- Public sector debt dynamics assessed under baseline and alternative scenarios.
- Key baseline projections and debt dynamics (Figure 7, Figure 8, and Table 1):
  - Nominal gross public debt (percent of GDP): 2018: 35.3; 2019: 38.4; 2020: 41.2; 2021: 56.3; 2022: 59.1; 2023: 56.9; 2024: 55.0; 2025: 53.3.
  - Public gross financing needs (percent of GDP): 2018: 4.5; 2019: 5.2; 2020: 6.3; 2021: 13.5; 2022: 15.8; 2023: 10.4; 2024: 9.4; 2025: 10.1.
  - Identified debt-creating flows and primary balance contributions are detailed in the Public Sector Debt Sustainability tables (e.g., primary deficit, automatic debt dynamics, exchange rate depreciation contributions).

### Key macro-financial indicators and risks
- External vulnerability indicators (Table 7):
  - Value of exports of goods and services, percent change: 2018: 17.4; 2019: 7.2; 2020: -38.8; 2021: 12.4; 2022: 18.1; 2023: 18.7; 2024: 16.3; 2025: 8.7.
  - Current account balance (percent of GDP): 2018: -6.8; 2019: -5.4; 2020: -9.7; 2021: -8.5; 2022: -6.3; 2023: -6.1; 2024: -5.6; 2025: -5.4.
  - External public debt (percent of GDP): 2018: 31.7; 2019: 33.4; 2020: 46.1; 2021: 49.8; 2022: 46.8; 2023: 43.9; 2024: 41.1; 2025: 38.4.
- Gross external financing needs and reserve coverage (Table 8 and Table 2):
  - Total financing requirement (in millions of US$): 2018: 2,444; 2019: 2,125; 2020: 3,020; 2021: 3,033; 2022: 2,031; 2023: 2,390; 2024: 2,525; 2025: 2,754.
  - Reserve cover metrics presented indicate gross international reserves in months of next year GNFS imports and percentages of short-term debt; gross international reserves in millions of US$: see Table 2 and Table 8 entries (e.g., 2019: 3,506; 2020: 3,533; 2021 proj.: 3,642).

### IMF financing and review schedule (program context)
- EFF program and review schedule key items (Table 10):
  - Approve the 36-month EFF: 12-Apr-17; Amount: 30 SDR millions (14.3 percent of quota).
  - Complete the sixth review based on end-December 2019 performance criteria: 12-Apr-20; Amount: 147 SDR millions (70.0 percent of quota).
  - Complete the seventh review based on end-June 2020 performance criteria: 25-Oct-20; Amount: 79 SDR millions (37.3 percent of quota).
  - Complete the eighth review based on end-December 2020 performance criteria: 20-Mar-21; Amount: 78 SDR millions (37.2 percent of quota).
  - Total available: 484 SDR millions (230.0 percent of quota).

*Source: IMF staff and national authorities (figures and tables extracted from the provided IMF chapter).*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Conjunctural Shocks and Scenarios
- Unexpected shift in the Covid-19 pandemic (Downside)
  - Likelihood: High
  - Expected Impact on the Economy if Risks Materialize: High
  - Key channels and outcomes described:
    - Disease harder to eradicate (e.g., difficulties in finding/distributing a vaccine) → more containment, persistent behavioral changes, costly reallocations of resources.
    - Insufficient monetary and fiscal policy response amid dwindling policy space and concerns about debt sustainability.
    - Financial markets reassess real economy risks → repricing of risk assets, unmasking of debt-related vulnerabilities, weakening financial intermediaries → reduced credit, weighing on growth.
    - Financing difficulties extend to vulnerable sovereigns → cascading debt defaults, capital outflows, depreciation pressures, and in some cases inflation.
    - Pandemic-prompted protectionist actions disrupt trade and global value chains.
  - Expected country-specific impacts for Georgia:
    - Renewal of lockdown measures in Georgia or trading partners would reduce growth and put pressure on government revenues.
    - Lack of recovery in the tourism sector would eventually increase non-performing loans and unemployment.
    - Increase in external imbalances would put pressure on the lari.
  - Policy Response recommended:
    - Utilize fiscal space to soften the negative impact on growth, extending measures to support individuals and providing additional support to businesses.
    - To the extent that inflation expectations remain anchored utilize available monetary policy space to support demand.
    - Maintain commitment to exchange rate flexibility but utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability.

- Unexpected shift in the Covid-19 pandemic (Upside)
  - Likelihood: Low
  - Expected Impact on the Economy if Risks Materialize: High
  - Scenario: Faster-than-expected recovery due to discovery of an effective and widely available vaccine and/or faster adjustment to the virus boosting confidence and activity.
  - Expected country-specific benefits:
    - Higher growth in trading partners would enable a faster recovery in Georgia, especially in the tourism sector.
  - Policy Response recommended:
    - Maintain prudent macroeconomic policies to build up buffers.

- Widespread social discontent and political instability
  - Likelihood: High
  - Expected Impact on the Economy if Risks Materialize: High
  - Description:
    - Social tensions erupt as the pandemic causes economic hardship (unemployment, higher incidence of poverty, shortages and higher prices of essentials) and exacerbates preexisting socioeconomic inequities.
    - Growing political polarization and instability (e.g., contested elections) weaken policymaking and confidence, disrupting economic activity.
  - Expected country-specific impacts for Georgia:
    - Disruptions in economic activity in Georgia’s trading partners would reduce growth and could threaten external financing flows from international financial institutions (IFIs) on which Georgia relies.
  - Policy Response recommended:
    - Utilize fiscal space to soften the negative impact on growth, extending measures to support individuals and providing additional support to businesses.
    - To the extent that inflation expectations remain anchored, utilize available monetary policy space to support demand.
    - Maintain exchange rate flexibility but use foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability.

### Structural Risks
- Accelerating de-globalization
  - Likelihood: High
  - Expected Impact on the Economy if Risks Materialize: Medium
  - Description:
    - Geopolitical competition and fraying consensus about the benefits of globalization lead to further fragmentation. Reshoring and less trade reduce potential growth.
  - Expected country-specific impacts for Georgia:
    - Accelerating de-globalization would put the merits of Georgia’s efforts to become a logistics hub in doubt. The country would need to find a new growth model that relies less on the external environment.
  - Policy Response recommended:
    - Allow the exchange rate to adjust to reflect the new fundamentals.
    - Utilize monetary and fiscal policy space to ensure that the output gap does not stay negative for too long.

### Georgia-Specific Structural Risks
- Financial risks
  - Likelihood: Medium
  - Expected Impact on the Economy if Risks Materialize: High
  - Description:
    - Exchange rate could depreciate rapidly undermining confidence in the currency and increasing inflation expectations.
  - Expected country-specific impacts for Georgia:
    - Depreciation in a highly dollarized economy threatens financial stability as households and firms struggle to repay loans, and could hurt growth.
    - Higher inflation and depreciation expectations could result in a vicious cycle of loan conversions putting further pressure on the currency.
  - Policy Response recommended:
    - 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.

- Fiscal risks (contingent liabilities/fiscal risks)
  - Likelihood: Medium
  - Expected Impact on the Economy if Risks Materialize: High
  - Description:
    - Materialization of contingent liabilities/fiscal risks could put pressure on the deficit.
  - Expected country-specific impacts for Georgia:
    - The need to cover contingent liabilities could result in lower capital spending or lower current spending, which has already been significantly compressed.
  - Policy Response recommended:
    - Continue improving SOE governance and fiscal risk management practices.
    - Enhance PFM monitoring in view of risks relating to COVID-19 spending.
    - Utilize fiscal buffers accumulated due to capital markets development strategy.

- Political risks
  - Likelihood: Medium
  - Expected Impact on the Economy if Risks Materialize: Medium
  - Description:
    - Political backlash and/or reform fatigue could undermine efforts to undertake structural reforms.
  - Expected country-specific impacts for Georgia:
    - Policy uncertainty could undermine confidence and hurt growth.
  - Policy Response recommended:
    - Maintain macroeconomic policy discipline.
    - Strengthen social safety nets to protect the most vulnerable and support inclusive growth.

*Source: 1geoea2020006 - Annex I. Risk Assessment Matrix*

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### Annex II. Reform on State-Owned Enterprises and Fiscal Risks Analysis

### Enhancing Monitoring and Transparency of Fiscal Risks
- Progress and institutional developments:
  - High-quality analysis of fiscal risks disclosed annually in the Fiscal Risk Statement (FRS); improving since first release in 2014.
  - The 2019 FRS included assessments of:
    - (i) impact of macroeconomic risks on the fiscal sector,
    - (ii) Georgia’s public sector balance sheet,
    - (iii) preliminary impact assessment of SOE sectorization on fiscal aggregates,
    - (iv) SOE performance, quasi-fiscal activities, and transfers received from the government,
    - (v) financial risk analysis of six major SOEs,
    - (vi) fiscal risks associated with PPAs and the stock of PPP liabilities.
  - Ministry of Finance established a Fiscal Risk Management Unit to centralize information on fiscal risks and contingent liabilities, collect information on PPAs and PPPs, and rationalize SOEs and their operations.

### Public Sector Balance Sheet (PSBS) Findings
- Overall assessment:
  - Latest analysis indicates PSBS is in a relatively sound position (see IMF Technical Report 2020).
- Key numeric indicators (2018 unless otherwise noted):
  - Public sector net worth estimated at 68 percent of GDP.
  - Public sector assets worth 149 percent of GDP.
  - Public sector liabilities worth 81 percent of GDP.
  - Georgia’s general government liquidity exposure and near-term gross financing needs are described as relatively comfortable.
- Main fiscal risks identified:
  - High public sector net foreign exchange exposure:
    - Estimated at 50 percent of GDP (mostly in U.S. dollars) — relatively large among measured countries, making the public sector vulnerable to exchange rate depreciation.
  - Demographic shifts and existing guarantees under PPAs set to increase fiscal pressures and could deteriorate public sector net worth:
    - Georgia’s intertemporal net worth measured under existing policies in 2019 (before the Covid-19 shock) was estimated to be negative (-35 percent of GDP) due to future fiscal deficits exceeding net worth.
    - Existing guarantees from PPAs are set to peak in 2024, with projected government costs estimated to average 0.5 percent of GDP (annually) over 40 years; this figure could double under adverse scenarios (exchange rate depreciation or regulatory risks).
    - One of the highest population ageing rates → health and pension spending expected to increase substantially in the medium-to-long term.
    - Recent increase in basic pensions and newly instated pension indexation rule add to the pension bill.

- Policy implication:
  - "In order to maintain current net worth, fiscal adjustments will be needed through reducing spending and/or increasing revenues." The authorities’ medium-term fiscal strategy proposes reforms to address these issues.

### SOE Sector: Size, Performance, and Risks
- Sector size and fiscal footprint:
  - Non-financial public corporation assets estimated at around 40 percent of GDP (and liabilities of an equivalent size).
  - Six largest SOEs account for two-thirds of the sector.
  - The sector has drawn around 6 percent of GDP from the government budget over the past five years.
- Financial performance and vulnerabilities:
  - On-lending has resulted in some heavily indebted public corporations.
  - Four public companies concentrate 80 percent of the loan book; about 15 percent has been subject to some loan rescheduling.
  - Deep analysis of the big six SOEs in the FRS:
    - Most are generating positive operating earnings, but only one generates sufficient profits to cover its capital costs; others make substantial losses.
    - Average return on assets decreased from 3.8 percent in 2016 to negative 4.8 percent in 2018.
  - Gross financing requirements estimated at 18 percent of GDP over 2020-22.
  - Leverage estimated at 88 percent; most SOEs are severely undercapitalized.
  - Estimated recapitalization needed to restore adequate levels of equity: around 7 percent of GDP.
  - FX exposure: a 30-percent depreciation would increase losses of the SOE sector by an estimated 4 percent of GDP.

### SOE Sectorization and Transparency Improvements
- Sectorization exercise finalized in March 2020:
  - Assessed all SOEs based on whether they are commercial on economic grounds, in line with IMF TA and GFSM 2014.
  - Results: 183 SOEs qualify as general government entities and 52 as public corporations.
  - In September 2020, 116 additional SOEs identified due to expanding municipal coverage to 100 percent; newly identified SOEs will be part of general government until assessed otherwise.
  - The sectorization is a cornerstone for SOE reform and sets the stage for improved management, monitoring, and corporate governance.
  - Expected fiscal impact of sectorization:
    - Increase in general government’s deficit by 1.4 percent of GDP and government debt by 0.7 percent of GDP.
  - Examples: ESCO, UWS, Melioration of Georgia, and the Partnership Fund classified as general government entities with reporting starting in 2021.

### Reform Initiatives to Reduce Fiscal Risks
- Comprehensive SOE reform planned:
  - Transition from identification/reporting of fiscal risks to management and mitigation.
  - Introduction of OECD principles for corporate governance of SOEs and other international best practices, with IMF and other international organization support.
  - Commitments by authorities (timeline and items):
    - (i) Define the rationale for ownership and long-term strategy of public corporations (by end-March 2021).
    - (ii) Pilot the strategy in selected companies (GSE and UWS).
    - (iii) Draft legislation incorporating a framework for public corporations in line with OECD principles.
    - Authorities committed to refrain from taking over any SOE debt or providing equity injections to SOEs without a strategy that fully supports commercial viability and improves corporate governance.
  - Expected outcomes: increase SOEs’ profitability, return on equity, and reduce fiscal risks.

- Additional commitments to monitoring and transparency:
  - Expand FRS coverage of PPAs and SOEs.
  - Authorities committed to refrain from undertaking new PPAs until an independent technical evaluation supports commercial viability and medium-term fiscal sustainability, in consultation with IMF staff.
  - The 2020 FRS will:
    - Assess PPAs;
    - Summarize the impact of SOE reclassification;
    - Analyze risks associated with the top 10 SOEs;
    - Assess gross financing requirements of major SOEs;
    - Estimate quasi-fiscal activities;
    - Assess impact of COVID-19 on major SOEs;
    - Highlight the SOE reform framework.

### Data and Accounting Improvements
- Current deficiencies:
  - Government financial statements based on national standards, are aggregated rather than consolidated, and remain unaudited at a consolidated level.
  - Gaps particularly regarding state land and non-financial assets.
  - By contrast, the NBG and SOE accounts are based on International Financial Reporting Standards.
- Planned reforms:
  - Transition to International Public Sector Accounting Standards (IPSAS) in 2020 (with adequate training and IT system preparation).
  - Institute auditing requirements of consolidated financial statements to help reduce data gaps.

*Source: 1geoea2020006 - Annex II. Reform on State-Owned Enterprises and Fiscal Risks Analysis*

---

### Annex III. Inflation Determinants

### Main Findings
- Inflation in Georgia is primarily driven by domestic factors and changes in the nominal effective exchange rate (NEER).
- Forward expectations drive long-term inflation dynamics; changes in the NEER and the monetary stance impact inflation in the short term.
- Monetary policy plays a role in controlling inflation in the short run and anchoring forward expectations in the long run.

### Stylized Facts and One-off Effects
- Inflation evolution (2012–120 as reported; text contains "2012-120" which is preserved from source):
  - Over 2012-120, headline inflation evolved from deflation (May 2012 deflation reached 3⅓ percent) to peaking above 7 percent in June 2017.
  - Inflation averaged 2⅔ percent over that period, alternating cycles of acceleration (2015, 2017 and 2019) and deceleration (2016 and 2018).
  - Inflation dynamics mainly reflected increases in food and services prices; housing and other consumption items contributed moderately.
- One-off effects:
  - Excise taxes on tobacco raised several times between 2013 and 2019.
  - Internet and communication and energy prices (electricity and gas) lowered in 2013 and 2014; electricity and gas prices raised between 2015 and 2018.
  - Health care reform entailed one-off increases in prices of medicines and medical services (2014 and 2016H1).
  - One-offs account for about 2 percentage points of average inflation in 2019.

### Model Specification
- An augmented hybrid Neo-Keynesian Phillips curve (NKPC) is used to capture domestic and external contributions to inflation.
- Formal specification from the source (variables preserved exactly):
  - 휋휋푡 = 훼훼1 + 훼훼2휋휋푡−1 + 훼훼3휋휋푡푒 + 훼훼4yyyyy푡 + 훼훼5mmmm푡 + 훼훼6nnnn푡 + 훼훼7표표표표표표푡 + 훼훼8표표mmyy푡 + u푡
  - Where:
    - 휋휋 is inflation (y-o-y);
    - 휋휋푒 represents one-year-ahead inflation expectations;
    - yyyyy is the output gap;
    - mmmm stands for the monetary stance;
    - nnnn is the change in nominal effective exchange rate;
    - 표표표표표표 is oil price inflation;
    - 표표mmyy is other imports price inflation;
    - m is a time index.
  - (Note: variable names and indices are preserved exactly as in the source text.)

- Monetary stance definition (from source footnote):
  - Monetary stance is calculated as the log difference between the seasonally adjusted currency in circulation and its trend estimated with the Hodrick-Prescott filter.
- Inflation expectations data:
  - Survey-based and derived from the Consensus Economics database.

### Empirical Findings
- Domestic factors and the NEER are significantly related to inflation dynamics (Table A1 referenced).
- Regression results summary (as described):
  - Ordinary least squares regression reported in first column.
  - Variables exhibit expected signs except forward expectations.
  - Output gap is not significant in the first specification; additional analysis shows a significantly positive coefficient on the output gap (column 2).
  - Constrained SUR estimates impose sum of weights on backward- and forward-looking expectations equal to one (last column reported).
  - Oil and other imports price inflation do not appear to be significantly related to inflation in either regression.

*Source: 1geoea2020006 - Annex III. Inflation Determinants*

### 5.      Forward expectations and changes in the NEER are the main determinants of headline

### 5.      Forward expectations and changes in the NEER are the main determinants of headline

### Key empirical findings
- Forward expectations have a consistently positive impact on inflation since 2012 (Text Figure).
- NEER appreciation contributed to lower inflation from 2012 to early-2019 while more recent depreciation pushed inflation upward.
- The model suggests that monetary policy was tight enough to decrease inflation in 2012-13, 2016 and 2018H2-2019H1, while it was loose enough to contribute to raise inflation in 2014-15.
- The effect of the output gap appears marginal.
- Inflation driven by oil and other import prices seems not significant.
- The unexplained contribution to inflation appears sizeable at some periods and could be traced back to one-off changes in prices following administrative decisions.
- Overall conclusion: forward expectations seem to be the long-term driver of headline inflation while short-term dynamics is driven by changes in the NEER and the monetary stance. This highlights the importance of monetary policy to control inflation in the short run while anchoring forward expectations for the long run.

### Augmented Hybrid Phillips Curve estimation (Table A1) — dependent variable: contemporaneous inflation; estimation sample: January 2012 – December 2019
- Estimation methods reported: (1) OLS, (2) SUR, (3) CSUR.
- Observations: 96
- Adjusted R-squared: 0.908 (OLS), 0.905 (SUR), 0.898 (CSUR)

- Lag of inflation
  - OLS: 0.866*** (0.036)
  - SUR: 0.851*** (0.035)
  - CSUR: 0.895*** (0.033)

- 1-year inflation expectations
  - OLS: -0.246* (0.126)
  - SUR: -0.266** (0.114)
  - CSUR: 0.105*** (0.034)

- Output gap
  - OLS: 0.096 (0.062)
  - SUR: 0.163*** (0.059)
  - CSUR: 0.137** (0.060)

- Monetary stance
  - OLS: 0.059** (0.026)
  - SUR: 0.075*** (0.024)
  - CSUR: 0.075*** (0.025)

- NEER change
  - OLS: -0.055*** (0.017)
  - SUR: -0.066*** (0.016)
  - CSUR: -0.075*** (0.016)

- Oil price inflation
  - OLS: -0.001 (0.003)
  - SUR: -0.002 (0.003)
  - CSUR: 0.002 (0.003)

- Other imports price inflation
  - OLS: -0.053 (0.039)
  - SUR: -0.050 (0.035)
  - CSUR: -0.008 (0.034)

- Constant
  - OLS: 1.503*** (0.562)
  - SUR: 1.647*** (0.512)
  - CSUR: -0.033 (0.111)

- Significance notation: * p < 0.10, ** p < 0.05, *** p < 0.01
- Standard errors in parentheses.

### Interpretation and policy implications
- Short-run inflation dynamics are sensitive to NEER changes and the monetary stance, implying active monetary policy can affect inflation in the short run.
- Long-run inflation is primarily driven by forward inflation expectations, implying policy should focus on anchoring expectations to achieve long-term inflation stability.
- Given sizeable unexplained contributions at certain periods, non-monetary one-off price changes (e.g., administrative decisions) can materially affect inflation and should be monitored.

*Source: Chapter 5 and Table A1 content from the provided IMF document.*

### 13. We aim to contain fiscal risks and remain committed to avoid domestic/external debt

### 13. We aim to contain fiscal risks and remain committed to avoid domestic/external debt payment arrears

### Contain external/domestic arrears and public guarantees
- Commitments:
  - Will not accumulate any general government’s 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.
- SOE support restrictions:
  - Will refrain from taking over any SOE debt or providing equity injections to SOEs without a comprehensive strategy that fully supports commercial viability and improves corporate governance; will consult with the IMF on the strategy and on specific measures.
  - Public corporations will refrain from engaging in any new quasi-fiscal activities.
  - Government will refrain from asking SOEs to engage in any new quasi-fiscal operations and to systematically report them in the Fiscal Risk Statement (FRS).

### Fiscal Risk Statement (FRS) and SOE/PPP risk management
- Reforms:
  - Reformed SOE monitoring and PPP frameworks to improve risk management and reap PPP benefits.
  - Commit 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,
    - (iv) updated estimates of quasi-fiscal activities (end-December 2020 structural benchmark).
- Status:
  - The 2020 FRS expands on fiscal risk analysis associated with SOEs (with coverage of over 90 percent of SOEs) and includes a sub-section on the impact of COVID-19 on SOEs and a section SOE governance reform plans.
- Ongoing commitments:
  - Continue to enhance the annual FRS by updating estimates associated with potential fiscal costs arising from PPPs including Purchasing Power Arrangements (PPAs) and those associated with SOEs.

### Partnership Fund (PF) operations
- Commitments and constraints:
  - Limit PF’s gross acquisition of financial and non-financial assets, other than cash and bank deposits, to zero except for existing commitments in ongoing projects (continuous performance criterion).
  - PF will not undertake any new projects nor engage in any net borrowing (continuous performance criterion).

### SOE governance reform strategy
- Objectives of new governance framework:
  - (i) Define general objectives, competitive neutrality, and rationale for ownership of public corporations.
  - (ii) Strengthen framework to identify, report and treat quasi-fiscal activities.
  - (iii) Enhance SOE corporate governance in line with OECD guidelines.
- Deliverables and timeline:
  - Plan to prepare a comprehensive draft strategy by end-March 2021, in consultation with IMF staff, and pilot the strategy in a few selected companies in preparation for a new legal framework for SOEs.

### Financing strategy and domestic capital market timing
- Adjustment due to reserves management:
  - To avoid a decline in external reserves, plan to issue an Eurobond in 2021, if market conditions allow; this will delay plans to expand domestic issuance.
- Medium-term plan:
  - Gradually increase the size of domestic benchmark bonds to encourage foreign investor participation and help scale up efforts to reduce FX risks over the medium term.

### Revenue administration strengthening
- Reform program context:
  - Following 2016 Tax Administration Diagnostic Assessment and IMF TA, reforms supported by the Revenue Mobilization Trust Fund.
- Key focus areas and timelines:
  - IT resources and capacity:
    - New IT strategy approved by head of GRS and IT investment plan in line with IMF TA recommendations.
    - Ministry of Finance committed resources; expect IT strategy fully implemented by end-2022.
  - VAT tax administration:
    - Reduce outstanding stock of VAT credits within the limitation period for audit from GEL1.4 billion at end-2017 to GEL700 million by end-2021 (at least 50 percent reduction).
    - By July 2021, aim to reduce outstanding stock of VAT claims to GEL1.0 billion.
    - Commitment to audit or risk-assess 100 percent of declarations (within statute of limitations) by mid-2020 delayed; plan to finalize by July 2021.
    - As of September 2020, approximately 50 percent of the value of VAT claims have been audited.
    - As of September 2020, approximately GEL300 millions of audited taxpayer declarations are assessed as valid to be refunded; plan to refund by March 2021.
    - Automatic VAT refunds implementation delayed; automatic VAT refunds effective November 20th, 2020.
  - Compliance and audit yields:
    - Use risk-based audits; pilot audit case management system to be launched by end-2020; fully operational in early 2021.
  - Taxpayer register:
    - GRS will create a register of employees for tax administration purposes by end–2021.
  - Information sharing:
    - Expand information sharing with government agencies and the Financial Monitoring Service (FMS); consider automatic reporting from financial institutions in context of automatic exchange of financial information for tax purposes, which Georgia committed to have implemented by September 2023.

### Budgeting, accounting, and fiscal transparency
- General government coverage and sectorization:
  - Sectorization exercise finalized in March 2020: 52 SOEs qualifying as public corporations and 183 as general government entities.
  - From January 2021, all fiscal reports will incorporate these changes; changes to PFM legislation required.
  - Any newly identified SOEs considered general government entities until prudent evidence supports classification to public corporation sector.
- Accounting and reporting improvements:
  - Starting in 2021, produce an annual consolidated central government sector financial report based on International Public-Sector Accounting Standards (IPSAS) basis.
  - Improve fiscal transparency by disclosing tax expenditures:
    - 2021 Budget documentation includes a statement on selected Value Added Tax (VAT) expenditures.
    - Work towards a comprehensive tax expenditure review by end-2021, with IMF and USAID support.

### Monetary policy: inflation targeting, exchange rate, and reserves
- Inflation Consultation Clause (ICC) under the program:
  - Dual consultation bands set symmetrically around the forecast for headline CPI.
  - If actual inflation deviates outside the inner consultation band of ± 2 percent, the NBG will consult with IMF staff on reasons and policies to return to target.
  - If actual inflation deviates outside the outer consultation band of ± 3 percent, a consultation with the IMF Board will be triggered.
- Inflation targeting commitment:
  - Maintain IT framework to preserve price stability; decisions depend on the inflation outlook and monitoring of inflationary expectations.
  - Note: NEER depreciated by 5.1 percent during February-October 2020.
- Exchange rate flexibility and reserves:
  - Maintain a flexible exchange rate regime while preventing excessive lari volatility; commitment signaled by a floor on net international reserves (NIR, performance criterion).
  - Post-COVID-19: suspended reserve accumulation and focused on providing FX liquidity; FX sales mostly ad-hoc interventions complemented by smaller sized FX sales.
- Reserve outcomes and targets:
  - End-June NIR reached $1,335 million, significantly above the target (target adjusted downwards to $966 million due to lower external disbursements).
  - Committed to end-December 2020 QPC to $1,100 million.
  - GIR are projected at $3.6 billion (105 percent of the ARA metric) at end-2020.
- Medium-term FX strategy:
  - Start rebuilding external buffers as economy recovers and markets allow.
  - FX policy guided by reserve adequacy and price stability goals; reserve accumulation objectives suspended when markets become disorderly.
  - Design a clear FX intervention strategy by May 2021, explaining FX policy goals and principles.

### Financial sector policy and stability measures
- Banking sector assessments and provisioning:
  - Banks asked to evaluate loan portfolio quality; on-site inspections suspended.
  - Encouraged use of moratoria on loan repayments; moratorium on fines where breaches emerged due to crisis.
  - Provided standardized scenarios and methodology to assess credit loss from current shock; guidelines aim to avoid delays in recognizing potential losses due to moratoria.
  - Provisioning rules:
    - For business loans: based on forecasted 2022 debt-service-coverage and debt-to-ebitda ratios with standardized sectoral forecasts.
    - For retail loans: assessed based on overdue days, restructuring status, previous use of moratorium, and payment-to-income ratios.
  - Banks conducted granular assessments to determine adequate general and specific provisions.
- Large exposure limits and timeline:
  - Tightened large exposure limit to 25 percent of Tier–1 capital for both related and non-related parties (interconnected borrowers).
  - Postponed full implementation until June 2022.
  - From January 2022, banks should refrain from creating any new exposures that breach this limit.
  - Will regularly collect additional information from banks on large borrowers and monitor portfolio concentration risk.
- Support for lending and capital measures:
  - Revised emergency liquidity assistance framework; accept broader collateral for temporary liquidity assistance.
  - Measures to restore lending: credit guarantees by government, liquidity support for banks, interest rate subsidies for lari-denominated mortgages to households.
  - Released capital requirements in March 2020 by more than 3 percentage points for CET–1.
  - May further release up to one percentage point of existing capital buffers, making current actual level of capital 4 percentage points above the minimum CET–1 requirement.
  - Plan to give banks a two-year period to re-build capital buffers, subject to economic recovery path.
  - Dividend distribution restricted for banks until capital buffers fully re-built.
- Regulatory and supervisory transitions:
  - Transition supervisory reporting from local GAAP to IFRS; banks required to fully transfer financial and regulatory reporting to IFRS framework by January 2023.
    - Develop IFRS-based supervisory reporting standards and forms, including new principles on asset provisioning and guidelines on models used for provisioning by June 2021.
    - Reporting forms and core principles adopted by end-2020; banks may voluntarily move to IFRS-based reporting starting 2021 while meeting local accounting standards.
    - Starting in 2022, banks start transitioning to IFRS-based rules; once fully transitioned, request capital adequacy information under IFRS on stand-alone and consolidated basis using relevant prudential filters.
  - Draft law on supplementary supervision for financial conglomerates to be submitted to Parliament by June 2021.
  - Standards for interest rate risk in the banking book—aligned with Basel and EBA guidelines—became effective in September 2020.
  - Publish annual Financial Stability Report: 2020 Financial Stability Report published in September 2020.
  - Develop regulation on fit-and-proper requirements for shareholders and beneficial owners of holding companies in line with EU legislation and Basel standards by April 2021.
  - By April 2021, develop secondary legislation on notifying and approving concentration in the banking sector and procedures to investigate competition complaints (in line with newly revised competition legislation and in consultation with IMF staff).
- Fintech and digitalization:
  - NBG created financial innovation office, a regulatory laboratory, a new digital bank licensing framework, and a new risk management framework using statistical, artificial intelligence, and machine learning models.
  - Private-public partnerships with banks to develop common Open API standards to become effective by April 2021.
  - Publish, by June 2021, a taxonomy on sustainable finance to support investor assessment of environmental standards.

### Banking resolution framework and instruments
- Approved secondary legislation (end-June 2020 structural benchmark) on:
  - NBG’s Resolution Committee and the inter-agency Financial Stability Committee.
  - Identification of critical functions.
  - Recovery plans.
  - Valuation.
  - Accelerated supervisory approvals during resolution (e.g., share acquisitions).
  - Regulation already establishes the bridge bank tool.
- Planned secondary legislation (end-December 2020 structural benchmark) to issue on:
  - Resolution plans.
  - Temporary administrator and special manager.
  - Recapitalization tools, including the bail-in.
  - Temporary public support and ex-post resolution fund.
  - ELA against government guarantees.

### Domestic capital market development and market infrastructure
- Legal and regulatory reforms implemented:
  - Adopted "Investment Funds Law of Georgia" in 2020 and introduced tax regime for investment fund operations; NBG introduced new regulations for investment fund operations and updated capital market regulations aligning with IOSCO principles.
  - Parliament adopted amendments to “Law of Georgia on Securities Market" in 2020 to improve transparency among issuers and incorporate provisions related to insider trading and market manipulation; framework in full compliance with EU directives and IOSCO principles.
- Market infrastructure and FX market:
  - Launched a market platform and a new code for foreign exchange transactions consistent with international best practices to increase participants, support price discovery, narrow spreads, and improve FX liquidity.
  - New FX code includes client protections (e.g., prohibition of front-running, restrictions on cross selling, greater transparency of FX conversion services and fees).
- Pending legislation and instruments (timing expectations):
  - Legislation for securities holding (dematerialized securities holding) and covered bonds expected to be approved in the first half of 2021.
    - Securities holding framework to strengthen investor protection and incorporate an indirect holding regime (only banks and brokers authorized to hold securities for clients).
    - Covered bonds legislation to improve availability of long-term lari funding for banks.
- Primary-dealer (PD) system transition (in consultation with IMF staff):
  - Updated regulations to allow PD system: primary market regulation issued jointly by MoF and NBG; core PD arrangement (agreement or MoU); market conduct regulation to separate PD own-trading and client orders.
  - Launched pilot intermediate market making arrangement (IMMA) for PD system in October; first auction took place end-November.
    - System includes a single issuance of a two-year bond to be reopened periodically; assess IMMA continuously and gradually extend it.
  - Update contractual agreements (e.g., repurchase and securities lending agreements) for financial transactions in public debt securities between PDs and MoF.

*International Monetary Fund — Chapter excerpt*

### 30. We are committed to resume implementation of our comprehensive structural reform

### 30. We are committed to resume implementation of our comprehensive structural reform agenda

### Structural reform objectives and policy measures
- Reform aims:
  - Strengthen Georgia’s connectivity through infrastructure spending and trade initiatives.
  - Improve education and vocational training.
  - Mobilize savings.
  - Improve the business environment.
  - Implement land and energy reforms.
  - Provide targeted social assistance and healthcare to protect the most vulnerable.
- Expected outcome: boost productivity and raise long-term potential growth while limiting economic scarring from the pandemic.

### Regional connectivity and infrastructure
- Continued investment in core infrastructure to transform Georgia into a transport and logistics hub connecting Europe with Asia and support regional development.
- East-West Highway progress:
  - Two out of four subsections (F1 and F2) are well underway.
  - Construction work on remaining subsections (F3 and F4) are at an early stage.

### Education and labor market reforms
- Education reform measures to improve job creation, productivity and wages:
  - Revise government decree on teachers regulatory documents to clarify roles at all 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;
    - (ii) introducing special exams for teacher’s promotion at each level of teacher status.
- Labor code modernization:
  - Provide better protection to workers and a sound and predictable legal environment to employers.
  - As part of the Association Agreement with the EU, revamped labor legislation will:
    - Clarify requirements for terms and conditions of employment.
    - Regulate working time.
    - Establish an official labor inspection body.
  - Legislation also to support legal protection of employers by improving predictability in employment agreements.

### Pension reform and savings mobilization
- Pension Agency actions:
  - Approved its investment strategy and is finalizing measures to access a more comprehensive set of investment instruments.
  - More than GEL1 billion of contributions has been accumulated.
  - Preparing to deploy these into (initially) a low-risk investment portfolio, as required by the law.
  - Over the medium-term the agency will gradually access a broader set of instruments to facilitate more diversified portfolios.
  - With adequate safeguards, the Pension Agency should promote savings and create an institutional investor for long-term lari assets.

### Business environment, insolvency, and corporate governance
- Corporate governance improvements:
  - Corporations will gradually be required to publish audited financial statements based on IFRS standards.
- Insolvency framework:
  - In September 2020, the Parliament approved the new insolvency law providing adequate protection of creditor rights, timely and efficient insolvency processes, and effective rehabilitation framework in line with best international standards.
  - The approval delay led to a re-set: final implementation of the framework for licensing professionals re-set to end-March 2021 (reset end-December 2020 structural benchmark).
  - The new law will promote more efficient insolvency procedures in the event corporate insolvencies increase after the COVID-19 shock.

### Land registration and rural development
- Land cadasters importance: protecting property rights, simplifying transactions, providing collateral for borrowing, and facilitating dispute resolution and mediation.
- Registered land plots:
  - 2.2 million currently registered.
  - Compared to 0.9 million at the launch of the land reform on August 1, 2016.

### Trade policy and diversification
- Trade agreements and negotiations:
  - Signed a free trade agreement with the U.K. to continue trade relations after its departure from the EU.
  - Continuing negotiations with Turkey to expand the current FTA.
  - Committed to pursuing FTAs with priority countries including South Korea, the United States, Israel, and the GCC countries.

### Energy reform
- Objectives: increase market competition, promote renewable energy, and enhance energy efficiency.
- Measures:
  - Government adopted a new Electricity Market Concept Design, promoting market rules; to become applicable for the natural gas sector by the end of 2021.
  - Continue promoting energy savings and independence, security in energy supply, and energy efficiency.
  - Developing national action plans on energy and climate, on energy efficiency, and on renewable energy.
  - Parliament adopted legislation on energy efficiency and performance in buildings in May 2020.

### Statistics and national accounts modernization
- Improvements in national accounts to support policymaking:
  - Compiled and published quarterly GDP at constant prices by expenditure in 2020.
  - Computed GDP based on supply and use tables (SUT) for 2019.
  - Plan to publish the balanced SUT by end-2020 to provide a more detailed picture of structural transformation.

### Program monitoring, safeguards, and reporting
- Program monitoring:
  - Assessed through quantitative performance criteria, indicative targets, an inflation consultation clause, and structural benchmarks.
  - Semi-annual program reviews based on June and December test dates.
  - Technical Memorandum of Understanding describes definitions of quantitative PCs, the inflation consultation clause, and data provision requirements.
- National Bank of Georgia (NBG) safeguards:
  - Maintains a strong safeguard framework and internal control environment.
  - Continues to engage independent external audit firms to conduct the audit of the NBG in accordance with international standards.
- Reporting commitments:
  - Treasury to provide monthly general government revenues within two weeks of month end and monthly expenditures and arrears of the central government within four weeks of month end.
  - Ministry of Finance to provide stock of general government debt by currency and original maturity within one month from quarter end.
  - Treasury to provide daily cash balances in all accounts of the general government as of the end of the previous business day.

### Key quantitative targets, outcomes, and program parameters (selected)
- Inflation consultation bands for CPI (in percent):
  - Central point: 6.0 / 6.4 / 3.5
  - Inner band, upper limit/lower limit: 8.0 / 4.0  5.5 / 1.5
  - Outer band, upper limit/lower limit: 9.0 / 3.0  6.5 / 0.5
- Select quantitative performance criteria and indicative targets for 2020 (millions of GEL unless otherwise indicated; NIR in million of U.S. dollars):
  - Ceiling on augmented general government deficit (program definition):
    - Target: 2,300
    - Adjusted Target: 2,507
    - Outturn (End-June): 1,492
    - Status: Met
    - End-December Target: 4,300
  - Ceiling on general government net budget lending:
    - Target: 405
    - Adjusted Target: 1.5
    - Outturn (End-June): 20.1
    - Status: Met
    - End-December Target: 150
  - Floor on NIR of NBG (end-period stock, million of U.S. dollars):
    - Target: 1,120
    - Adjusted Target: 966
    - Outturn (End-June): 1,335
    - Status: Met
    - End-December Target: 1,100
  - Ceiling on the accumulation of external debt arrears of the Public Sector (continuous criterion) (million of U.S. dollars):
    - Target: 0
    - Adjusted Target: 0
    - Outturn: 0
    - Status: Met
  - Ceiling on the cash deficit of the Partnership Fund (million of U.S. dollars):
    - Target: 0
    - Adjusted Target: 0
    - Outturn (End-June): -4
    - Status: Met
  - Indicative target — Ceiling on Primary Current Expenditures of the General Government (in mn lari):
    - Target: 6,000
    - Adjusted Target: 6,000
    - Outturn (End-June): 5,482
    - Status: Met
    - End-December Target: 12,450
  - Stock of VAT credits (evaluated mid-June/mid-December):
    - Target: 1,470
    - Adjusted Target: 1,470
    - Outturn (End-June): 1,303
    - Status: Met
- NIR program exchange-rate basis:
  - The NIR target is set at a program rate defined as the exchange rate on December 31, 2016, which for the GEL/US$ was 2.6468.
- Program exchange rates (Currency/US$):
  - SDR: 0.7439
  - GEL: 2.6468
  - AUD: 0.7227
  - CAD: 0.7419
  - EUR: 1.0556

*Source: Excerpt from the IMF-supported program documents and Technical Memorandum of Understanding for Georgia.*

### 7.      Performance criteria and indicative targets have been set for end-June 2020 and end-December

### 1geoea2020006 - 7.      Performance criteria and indicative targets have been set for end-June 2020 and end-December

### Monitoring framework and test dates
- Performance criteria and indicative targets are set for end-June 2020 and end-December 2020 (the next two test dates).
- Monitoring:
  - Targets are monitored on a cumulative basis from the beginning of the calendar year, except:
    - the NIR target, which is monitored in terms of stock levels;
    - new net borrowing by the Partnership Fund, which is monitored since program approval.
  - Continuous performance criteria are monitored on a continuous basis.

### D. Inflation Consultation Mechanism
- Test date inflation:
  - Defined as the year-on-year percentage change of the monthly consumer price index (CPI) in the month of the test date as measured and published by the National Statistics Office of Georgia (GEOSTAT).
- Consultation triggers and consequences:
  - If test date inflation falls outside the outer bands specified in Table 1 of the MEFP:
    - Authorities will complete a consultation with the IMF Executive Board focusing on: (i) the stance of monetary policy and whether the Fund-supported program remains on track; (ii) the reasons for the deviation; and (iii) the proposed policy response.
    - Access to Fund resources would be interrupted until the consultation takes place and the relevant program review is completed.
  - If test date inflation falls outside the inner bands specified in Table 1 for the test dates:
    - Authorities will complete a consultation with IMF staff on the reasons for the deviation and the proposed policy response.

### E. Program definitions, adjustors, and reporting requirements — General government
- Ceilings on:
  - (i) the augmented cash deficit of the general government; and
  - (ii) net budget lending.

- Augmented cash balance definition (paragraph 10):
  - 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 (paragraph 11):
  - Measured from the financing side at current exchange rates established by the NBG at the date of the transaction.
  - 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 augmented cash deficit (paragraphs 12–14, 16):
  - Upward/downward by the cumulative total amount of foreign-financed project loan disbursements above/below the program amounts (Table 2).
  - Downward by the cumulative amount of receipts from sale of non-financial assets above the program amounts (Table 2).
  - Upward/downward by the cumulative amount of VAT credits refunded in cash above/below the program amounts (Table 2).
  - Upward/downward for on-lent amounts from foreign-financed project loan disbursements above/below program amounts (Table 2) (paragraph 15).
  - Upward (higher deficit) for healthcare costs related to prevent the COVID-19 spread and treating COVID-19 cases in excess of the originally planned amount of GEL[351] million (Table 2). Activities included are defined by specified Government Decrees (paragraph 16).

- Government decrees and activities included for the COVID-19 healthcare adjustor (paragraph 16):
  - 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 4.8² – 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. Georgia: 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 / 1,170
    - Receipts from sale of non-financial assets: 83 / 150
    - VAT refunds: 300 / 600
    - On-lent amounts from project loan disbursements: 80 / 250
  - Footnote 1: This value excludes 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. Adjustments will not be made on these loans.

- Supporting material for monitoring (paragraphs a–g):
  - a. Data on domestic bank and nonbank financing provided by the NBG and the Treasury Department of the Ministry of Finance within four weeks after the end of each month.
  - b. Data on external project financing and other external borrowing provided monthly by the Ministry of Finance (specifying projects by creditor) within two weeks of the end of each month.
  - c. Healthcare spending specified under Government Decree #164 28.01.2020 (Articles 4 and 4.8² and Annex #20) and Government Decree #653 25.12.2019.
  - d. Data will be provided at actual exchange rates.
  - e. Data on receipts from sales of non-financial and financial assets of the general government provided monthly by the Treasury Department of the Ministry of Finance within two weeks of the end of each month.
  - f. Data on securitized debt sold by the NBG, including securities purchased by nonbanks, reported by the NBG monthly within two weeks of the end of each month.
  - g. Data for the previous month 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 definition (paragraph 17):
  - Consistent with GFSM 2001, net budget lending is defined as the net acquisition of financial assets for policy purposes by the general government.

- Ceiling on Current Primary Expenditures of the General Government
  - Definition (paragraph 18): primary current expenditures is defined as expense (as defined by GFSM 2001) on a cash basis, minus interest payments.
  - Supporting material (paragraph 19): Data for monitoring expenditures will come from accounts of general government covered under the augmented cash deficit ceiling; Ministry of Finance to report data on expense and net acquisition of non-financial assets within four weeks after the end of the quarter.

- Ceiling on the Outstanding stock of VAT credit refunds (paragraph 20):
  - Supporting material: Data for period from the 16th day of the previous month to the 15th day of the current month 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 criteria and ceilings
- Continuous performance criterion on accumulation of general government external debt arrears (paragraphs 21–23):
  - Debt definition: 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 defined by residency of the creditor.
  - External payment arrears definition (paragraph 22): 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.
  - Continuous ceiling: Applies throughout the arrangement period; does not apply to arrears arising from external debt being renegotiated where creditor has agreed that no payment is needed pending negotiations.
  - Supporting Material (paragraph 23): Accounting of non-reschedulable external arrears by creditor, with detailed explanations, transmitted monthly within two weeks of the end of each month.
  - Note: “Arrears to Turkmenistan.” (footnote)

- Continuous indicative target on accumulation of general government domestic expenditure arrears (paragraphs 24–25):
  - Definition (paragraph 24): Domestic expenditure arrears are non-disputed payment obligations whose execution term has expired and became overdue. Arise from any expenditure item, including debt service, wages, pensions, and goods and services. Arrears arise from non-debt liabilities not paid after 60 days of the contractual payment date or—if no contractual date—after 60 days of the receivable. Any wage, pension or other entitlement not paid after a 30-day period from the due date is in arrears.
  - Supporting material (paragraph 25): Accounting of new domestic expenditure arrears transmitted within four weeks after the end of each month.

- Continuous ceiling on new guarantees issued by the public sector (paragraphs 26–27):
  - Definition (paragraph 26): A guarantee 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 (paragraph 27): Ministry of Finance will provide information on any new guarantees issued within 4 weeks after the end of each quarter.

### Partnership Fund: definitions, ceilings, and reporting
- Ceiling on the cash deficit of the Partnership Fund (paragraphs 28–30):
  - Definition (paragraph 28): Cash deficit measured as expenditures minus revenues.
  - Revenues (paragraph 29): Dividends from assets and investments, interest earnings from loans it provides, fees for services and guarantees, and any other income earned from assets.
  - Expenditures (paragraph 30): All current and capital expenditures. Current expenditures comprise compensation of employees, purchase of goods and services, transfers to other entities, other account payables and domestic and external interest payments. Capital expenditures comprise net acquisition of nonfinancial assets as defined under GFSM 2001. Partnership Fund’s purchase of financial assets (e.g., lending and equity participation) will not be considered part of its expenditures.

- Ceiling on new net borrowing by the Partnership Fund (paragraphs 31–32):
  - Definition (paragraph 31): Net borrowing defined as contracted debt liabilities minus principal repayments.
  - Supporting material (paragraph 32): Ministry of Finance to provide detailed quarterly information on Partnership Fund’s 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 (paragraphs 33–34):
  - Definition (paragraph 33): New investments defined as gross acquisition of non-financial and financial assets, excluding (i) currency and deposits and (ii) other accounts receivables. Further excluded are transactions unambiguously required by contractual obligations established before November 1, 2019.
  - Supporting material (paragraph 34): Ministry of Finance to provide quarterly acquisition information within four weeks of quarter-end; notify IMF about transactions required by preexisting contractual obligations within 10 days of occurrence and provide documentation.

### Net International Reserves (NIR) of the NBG
- Definition and components (paragraph 35):
  - NIR in U.S. dollars defined as 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 defined as 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 defined as 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.
  - Valuation: For program monitoring purposes, stock of foreign assets and foreign liabilities shall be valued at program exchange rates as described in paragraph 2 above.
  - Stock level: The stock of NIR amounted to $1,335 million as of June 30, 2020 (at program exchange rates).

- Budget support definitions (paragraph 36):
  - 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.

- NIR adjustors (paragraph 37):
  - Floor on NIR will be adjusted as follows:
    - Upward (downward) by any excess (shortfall) of FX privatization revenue in foreign exchange above (below) the programmed amounts. (Privatization receipts defined as proceeds from sale, lease, or concessions of public entities and properties.)
    - 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. Georgia: Projected Balance of Payment Support Financing (Million of U.S. dollars)
  - June 30, 20201 / December 31, 20202
    - Projected privatization revenue: 0.0 / 0.0
    - Budget support grants from external donors and not related to project financing: 0.0 / 118.6
    - Budget support loans, including bilateral and multilateral donors for budget support: 297.8 / 908.1
    - Disbursements of project loans and grants: 75.9 / 335.1
  - Footnotes:
    - 1 Cumulative from January 2020 to end-June 2020.
    - 2 Cumulative from January 2020 to end-December 2020.
    - 3 Flows are valued at program exchange rates for the June and December targets.

*International Monetary Fund — Georgia: Excerpts on performance criteria, adjustors, definitions, and reporting requirements (selected paragraphs).*

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

### Supporting material: Data on net international reserves (both at actual and program exchange rates); net foreign financing (balance of payment support loans, cash grants to the general government, amortization (excluding repayments to the IMF), interest payments on external debt by the Ministry of Finance and the NBG; and conversions for government imports will be provided to the IMF in a foreign exchange cash flow table (which includes details of inflows, outflows and net international reserves) on a weekly basis within three working days following the end of the week.

### Weekly reporting requirement
- The authorities will provide the IMF with a foreign exchange cash flow table on a weekly basis within three working days following the end of the week.
- The cash flow table will include:
  - Data on net international reserves (both at actual and program exchange rates).
  - Net foreign financing (balance of payment support loans, cash grants to the general government, amortization excluding repayments to the IMF, interest payments on external debt by the Ministry of Finance and the NBG).
  - Conversions for government imports.
  - Details of inflows, outflows and net international reserves.

### Statement by Mr. Hilbers, Mr. Rashkovan, and Mr. Zedginidze on Georgia — December 16, 2020
- On behalf of the Georgian authorities, the statement thanks Mission Chief Ms. Vera Martin and her team for the constructive policy dialogue and insightful report.
- The authorities broadly agree with the policy advice and staff’s assessment of the economy.

### Economic performance and outlook
- The Georgian economy is battling the protracted impact of the pandemic.
- Q3 2020: the economy showed signs of recovery as businesses reopened after stringent measures.
- A recent surge in Covid-19 cases necessitated a tightening of social restrictions.
- Authorities expect GDP to contract by 5.1 percent in 2020, before rebounding back to 4.3 percent in 2021.
  - This estimate assumes that tourism revenues in 2021 will reach only 25 percent of their 2019 level.
- Authorities note recovery could be stronger depending on vaccine developments.
- Performance under the EFF program:
  - All structural benchmarks implemented, including adoption of a rule-based pension system.
  - Progress in implementation of banking resolution and insolvency frameworks.
  - All quantitative performance criteria (QPC) were met.
  - QPC on the augmented fiscal deficit and Net International Reserves (NIR) were met by decent margins.
  - Inflation remained within the inner band of the inflation consultation clause.
- Fiscal performance:
  - 2020 deficit widened to 9 percent of GDP driven by pandemic-related spending and slowdown.
  - Revenue performance was better than expected, enabling continued infrastructure spending.
- Medium-term growth potential:
  - Georgia’s medium-term growth potential remains strong, with a growth rate above 5 percent.
  - Supported by sound macroeconomic policies, infrastructure spending, and structural reforms.

### Policy response to Covid-19
- Social restrictions:
  - On November 26, the government adopted a resolution to restrict movement and activity in the retail and hospitality sectors for two months in response to the recent surge in Covid-19 cases.
  - Contact-intensive sectors and vulnerable people are particularly hard hit.
- 2021 budget and fiscal measures:
  - 2021 budget includes additional measures to support affected households and businesses.
  - The new fiscal package includes increased healthcare spending, a tax credit to support wages, and income transfers targeted to low-income households.
  - In total, additional fiscal costs to counter the direct and indirect impact of the pandemic in 2021 accounts for 2.1 percent of GDP.
  - Authorities emphasize measures are targeted and temporary.
- Monetary and financial sector response:
  - The National Bank of Georgia’s prompt actions helped ease liquidity and credit constraints.
  - Banks maintain sound financial positions per authorities’ and staff’s recent assessment.

### Medium-term policies

#### Fiscal policy and reforms
- The authorities reiterate commitment to fiscal consolidation in the medium-term.
- 2021 fiscal deficit is projected at 7.5 percent of GDP, implicating a 5.2 percent of GDP in cyclically-adjusted terms.
  - This compares to a 9 percent deficit in 2020 (6.7 in cyclically-adjusted terms).
- The 2021 budget allows increased healthcare and infrastructure spending while signaling resumption of fiscal consolidation.
- Adopted fiscal rule (Organic Law) prescribes:
  - A fiscal deficit under 3 percent of GDP by 2023.
  - Public debt under 60 percent of GDP by 2023.
- Authorities stand ready to adopt additional measures in consultation with the IMF to strengthen fiscal sustainability if needed.
- Fiscal reform progress:
  - Progress on revenue administration and fiscal risk analysis.
  - Improvements in SOE governance; until SOE reform is finalized, authorities commit to refrain from taking over any SOE debt or providing equity injections.
- Public Investment Management (PIM):
  - IMF’s PIM Assessment (May 2018) finds Georgia shows weaknesses in some areas and performs better than average compared to EMEs in other areas.
  - Several efforts to improve PIM have been underway since 2018; the end-2019 benchmark on strengthening PIM methodology was met.
  - With plans to scale up public infrastructure and increase municipal capital expenditure, authorities will continue efforts to bring PIM to best international standards.

#### Monetary and Financial sector policies
- Authorities view a flexible exchange rate and macroeconomic adjustment as first line of defense; high dollarization and temporary drop in tourism revenue called for FX interventions.
  - Prior to the pandemic, the NBG intervened mostly to build up reserves.
  - Since the pandemic started, the exchange rate absorbed significant shocks; NBG considers additional depreciation benefits limited due to impact on unhedged FX borrowers.
  - Authorities will continue to intervene to smoothen volatility while remaining committed to maintaining adequate reserves.
- NBG monetary policy:
  - NBG maintains its policy rate at 8 percent and stands ready to tighten if exchange rate pressures intensify.
  - Authorities note excessive tightening may incentivize borrowers to move from local currency loans toward FX loans, increasing FX mismatches, and may adversely affect sluggish growth.
  - NBG believes further increases of FX pressures may warrant a coordinated response of monetary and fiscal policies.
- Financial stability and de-dollarization:
  - Financial sector policies outlined in the MEFP aim at containing the pandemic impact and building resilience.
  - Despite NBG progress, dollarization remains elevated and is a concern.
  - Authorities expressed interest in a successor program, among other objectives, to support de-dollarization efforts.

### Structural reforms
- Authorities commit to resume implementing reforms at full speed once the pandemic subsides.
- Plans include scaling up investment in physical and human capital, and initiating free trade agreements to attract foreign investment and improve competitiveness.
- Staff’s emphasis on judicial reform and the insolvency framework is welcomed; ongoing efforts address challenges on these fronts.
- According to various international ratings, Georgia’s business environment overall fares relatively well compared to other EMEs.

### Conclusion
- Prompt augmentation of the EFF arrangement helped authorities counter the social and economic impact of the pandemic and catalyze donor financing.
- On the back of positive performance under the EFF program, the authorities request completion of the 7th review and modification of performance criteria.
- Authorities express interest in a successor program to support their reform agenda going forward and express gratitude for the Fund’s continued support.

*Statement by Mr. Hilbers, Mr. Rashkovan, and Mr. Zedginidze on Georgia — December 16, 2020.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1geoea2020006.pdf_