## GEORGIA: REQUEST FOR A STAND-BY ARRANGEMENT (1geoea2022002) ## Source details **Canonical URL:** [GEORGIA: REQUEST FOR A STAND-BY ARRANGEMENT (1geoea2022002)](https://www.imf.org/-/media/files/publications/cr/2022/english/1geoea2022002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1geoea2022002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1geoea2022002.pdf.json) --- ### Context and program purpose - Authorities intend to treat the new IMF arrangement as precautionary. - Program goals: - further entrench macroeconomic stability, - build resilience, - strengthen medium-term growth as Georgia emerges from the COVID-19 pandemic and contends with spillovers from the war in Ukraine. - Priorities: - rebuild fiscal buffers while reducing debt and protecting the vulnerable; - full compliance with the fiscal rule’s deficit ceiling by 2023; - strengthen tax administration, streamline tax expenditures, develop a medium-term revenue strategy; - public financial management strengthening and state-owned enterprise (SOE) reform; - NBG focus: bring down high inflation, maintain exchange rate flexibility, strengthen reserves, enhance communication; - financial sector: enhance financial safety nets, foster capital market development, strengthen AML/CFT framework; - structural reforms: improve business environment, governance, education, active labor market policies, IT infrastructure, and digitalization. ### Recent economic developments and outlook (key statistics) - Real GDP: 2020: -6.8; 2021: 10.4; 2022 (preliminary): 3.2; 2023 (projection): 5.8. - Nominal GDP (billion laris): 2019: 49.3; 2020: 49.3; 2021: 60.2; 2022: 69.0; 2023: 77.0. - Nominal GDP (billion U.S. dollars): 2019: 17.5; 2020: 15.8; 2021: 18.7; 2022: 22.3; 2023: 24.2. - GDP per capita (thousand U.S. dollars): 2019: 4.7; 2020: 4.3; 2021: 5.0; 2022: 6.0; 2023: 6.5. - GDP deflator, period average: 2019: 4.9; 2020: 7.3; 2021: 10.6; 2022: 11.3; 2023: 5.3. - CPI, Period average: 2019: 4.9; 2020: 5.2; 2021: 9.6; 2022: 10.9; 2023: 5.1. - CPI, End-of-period: 2019: 7.0; 2020: 2.4; 2021: 13.9; 2022: 8.1; 2023: 3.4. - Current account balance (percent of GDP): 2019: -5.5; 2020: -12.4; 2021: -9.8; 2022: -10.9; 2023: -7.5. - Trade balance (percent of GDP): 2019: -21.4; 2020: -20.0; 2021: -20.1; 2022: -20.3; 2023: -19.6. - Gross international reserves (US$ billion): 2019: 3.5; 2020: 3.9; 2021: 4.3; 2022: 3.3; 2023: 3.3. - Gross international reserves as percent of IMF Composite measure (floating): 2019: 101.1; 2020: 108.1; 2021: 107.7; 2022: 79.4; 2023: 74.9. - Gross external debt (percent of GDP): 2019: 87.7; 2020: 109.6; 2021: 98.2; 2022: 85.8; 2023: 80.6. ### Fiscal policy and public finances - Consolidated government operations (percent of GDP): - Revenue and grants: 2019: 27.1; 2020: 25.2; 2021: 25.4; 2022: 25.2; 2023: 25.3. - Tax revenue: 2019: 23.7; 2020: 22.3; 2021: 22.5; 2022: 22.8; 2023: 23.1. - Expenditures: 2019: 28.9; 2020: 34.5; 2021: 31.4; 2022: 29.1; 2023: 28.0. - Expense: 2019: 21.4; 2020: 26.3; 2021: 24.5; 2022: 21.7; 2023: 21.9. - Net acquisition of non-financial assets: 2019: 7.6; 2020: 8.2; 2021: 6.9; 2022: 7.4; 2023: 6.1. - Capital spending: 2019: 8.0; 2020: 8.6; 2021: 7.6; 2022: 8.0; 2023: 6.4. - Augmented Net lending / borrowing (program definition) 1/: 2019: -2.1; 2020: -9.4; 2021: -6.1; 2022: -4.0; 2023: -2.8. - General government debt 2/: 2019: 40.4; 2020: 60.2; 2021: 49.5; 2022: 47.1; 2023: 45.8. - Foreign-currency denominated: 2019: 32.0; 2020: 47.6; 2021: 39.8; 2022: 37.5; 2023: 35.5. - Budget execution Jan–Apr 2022 vs Jan–Apr 2021: - Revenues and grants Jan–Apr 2021: GEL 4,240 (7.0% of GDP); Jan–Apr 2022: GEL 5,565 (8.1% of GDP); difference: 1.1% of GDP. - Taxes Jan–Apr 2021: GEL 3,733 (6.2% of GDP); Jan–Apr 2022: GEL 5,060 (7.4% of GDP); difference: 1.2% of GDP. - Primary current spending Jan–Apr 2021: GEL 4,276 (7.1% of GDP); Jan–Apr 2022: GEL 4,654 (6.8% of GDP); difference: -0.3% of GDP. - Net lending / borrowing Jan–Apr 2021: -1,307 (-2.2% of GDP); Jan–Apr 2022: -475 (-0.7% of GDP); difference: 1.5% of GDP. - Nominal GDP Jan–Apr 2021: GEL 60,232; Jan–Apr 2022: GEL 68,412. - Fiscal rule and targets: - Fiscal rule: bring the deficit below 3 percent of GDP by 2023. - Augmented general government deficit path: 4.0 percent of GDP in 2022; 2.8 percent of GDP in 2023; 2.3 percent of GDP in 2024. - Performance criteria: End-June 2022 augmented cash deficit: GEL 1,370; Indicative primary current spending ceiling (end-June): GEL 7,030. ### Revenue mobilization and tax administration reforms - Key commitments and milestones: - Finalize new audit case management system (CMS) and implement (CMS piloted Feb-2021; implemented Jan-2022). - Create register of employees for tax administration. - Amend budget code to make annual tax expenditure reporting legally binding (end-September 2022 SB). - Publish first tax expenditure report (end-December 2022 SB). - Prepare cost-benefit analysis for key tax expenditures (end-June 2023 SB). - Develop a Medium-Term Revenue Strategy (MTRS) with IMF TA (end-September 2023 SB). - VAT refunds/liquidity: - Commit to automatically process at least 90 percent of new VAT credit claims (measured as both the number and value of declarations) within 30 calendar days (end-July 2022 and end-January 2023 SBs). - Reduce the stock of audited VAT declarations cleared for payment to no more than GEL 50 million (end-December 2022 SB). - Reduced outstanding stock of VAT credits within limitation period from GEL 1.4 billion (end-2017) to GEL 1.0 billion (end-Dec-2021). ### Monetary policy and inflation - Inflation dynamics: - Headline inflation peaked in December 2021 at 13.9 percent (y/y) and declined by about 1 percentage point by April 2022, remaining well above the NBG’s 3 percent target. - Four-fifths of elevated inflation due to high food, transportation, and utility prices. - Core inflation peak April 2021: 6.9 percent (y/y); declined by almost 2 percentage points since that peak. - Policy rate and FX: - NBG increased its policy rate by a cumulative 300 basis points (to 11 percent) since March 2021. - Lari: initial sharp depreciation after the outbreak of the war in Ukraine, then recovered beyond pre-war level; in May the NBG conducted its first auction to purchase foreign exchange since 2019. - Monetary stance guidance: - Moderately tight policy appropriate; NBG stands ready to tighten further if inflation expectations or core inflation accelerate or wage pressures rise. - NBG committed to update communication strategy (end-December 2022 SB). ### Financial sector resilience and policies - Banking sector indicators: - Liquidity coverage ratio: 118 percent as of April 2022 (minimum requirement 100 percent). - NPL ratio: declined from 8.3 percent in March 2021 to 5 percent in March 2022. - Restructured loans: declined from 21.2 percent in February 2021 to 15.3 percent in March 2022. - Credit to private sector (annual percent change): 2019: 20.7; 2020: 22.4; 2021: 12.4; 2022: 20.9; 2023: 11.6. - Broad money (annual percent change): 2019: 17.6; 2020: 24.6; 2021: 11.3; 2022: 19.9; 2023: 14.0. - Macroprudential measures: - Lowered maximum mortgage maturity (FX) and applied tighter PTI limits. - Recalibrated CICR buffer to assign higher risk weights to more dollarized loan portfolios. - Increased income threshold for stricter PTI ratio (effective April 1). - Introduced 3-percentage point interest rate shock in PTI calculation for floating rate loans (effective May 1). - Supervisory and resolution actions: - Plan to fully implement large exposure limits by June 2022. - Codify General Risk Assessment Program and update guidelines (end-June 2022 SB). - Implement prompt corrective action framework policy guidance (end-December 2022 SB). - Develop playbook to operationalize bridge bank tool (end-March 2023 SB). - Enhance data collection (MOU with Georgia Revenue Service and Public Registry) and publish assessment of climate-related financial sector risks (end-December 2022 SB). - AML/CFT and sanctions: - Authorities required banks to adhere to international sanctions, which limited risks. - Implement FATF and MONEYVAL fifth round recommendations, including regulation for gaming sector, virtual asset service providers, and real estate agents. ### Program design, financing, and monitoring - SBA design: - Proposed three-year SBA provides access of 100 percent of quota (SDR 210.4 million) phased equally over program duration. - Schedule of Reviews and Available Purchases (selected): - 15-Jun-22: Approve the 36-month SBA — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 3-Oct-22: Complete first review — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 3-Apr-23: Complete second review — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - Total available: 210.4 SDR millions (100.0 percent of quota). - Program monitoring instruments: - Inflation consultation clause (ICC) set symmetrically around projected 12-month headline inflation. - Quantitative performance criteria (PCs): ceilings/floors on fiscal and reserve metrics; continuous PCs on accumulation of external debt arrears and new public guarantees. - Indicative ceiling on primary current spending and indicative target on accumulation of general government domestic expenditure arrears. - Structural benchmarks: SOE reforms, PIM improvements, tax expenditure reporting, VAT refund targets, NBG communications update, labor market survey, etc. - Financing and capacity to repay: - Adequate financing in place for next 12 months and good prospects for full period. - Debt service manageable even under downside scenarios. - If all drawings are made and adverse scenario materializes, obligations from lending programs would reach 0.7 percent of GDP in 2027 (1.4 percent of exports and 5.2 percent of gross international reserves). ### Risks, stress tests, and downside scenario implications - Key risks: - Deeper/protracted spillovers from the war in Ukraine, new COVID-19 variants, lari depreciation (high dollarization), domestic political uncertainty. - Downside scenario (protracted regional conflict) assumptions and impacts: - Commodity prices: 10 percent higher in 2023 vs baseline. - Remittances: decline by 10 percent in 2023 vs baseline. - Services exports/tourism: recovery delayed (tourism revenue reaches 2019 level in 2024 instead of 2023). - Nonresidents sell local government bonds: around US$130 million in 2022. - Macroeconomic effects: current account deteriorates by about 1 percent of GDP in 2022 and 1.5 percent of GDP in 2023. - Reserves under downside: fall to 62 percent of the ARA metric by 2024; rise to 66 percent of ARA metric in 2025; drawing on SBA would bring reserves to around 72 percent of the ARA metric by end-2025. - Fiscal support in downside: increase targeted support by 0.2 percent of GDP (doubling existing measures) plus assumed additional temporary support of 0.3 percent of GDP for vulnerable households and 0.2 percent of GDP for affected businesses. - Policy responses assumed in downside: - Maintain tight monetary policy; allow exchange rate to act as shock absorber; use reserves to prevent disorderly depreciation. - Fiscal reprioritization and targeted social support; seek external official support and donor financing. ### Debt sustainability and Annex II findings - Overall assessment: - Public debt assessed as sustainable; expected downward path after sharp rise in 2020. - Public debt-to-GDP: peaked at 60 percent in 2020; dropped by 10 percentage points in 2021; projected close to 40 percent of GDP by 2027. - Currently, 80 percent of public debt is FX-denominated. - Key numbered findings: 1. Public debt-to-GDP increased sharply in 2020 by 20 percentage points. 2. Public debt-to-GDP declined by 10 percentage points in 2021; projected to return to close to 40 percent of GDP by 2027. 3. Public debt projected to comply with the 60 percent fiscal rule; 2023 public debt projected at 46 percent of GDP under baseline; including non-market SOEs and PPPs estimated at 48 percent of GDP in 2023. 4. Debt remains below high-risk thresholds in standardized stress tests. 5. After Eurobond rollover April 2021, gross financing needs risks remain low; 80 percent of public debt FX-denominated; long maturities and large share owed to official creditors mitigate risks. 6. Projections do not incorporate contingent liabilities; key fiscal risks from PPAs and SOEs. 7. External debt expected to decline from about 98 percent of GDP in 2021 to just below 60 percent of GDP in 2027 under baseline. ### External position, NIIP, and reserves - NIIP level: 140.5 percent of GDP; (negative) NIIP narrowed by 17.0 percent of GDP relative to end-2020. - Composition of gross liabilities (end-2021): FDI: about 51.3 percent; Loans: about 33.9 percent. - 2021 CA deficit: 9.8 percent of GDP (preliminary). - Tourism and remittances drivers: remittances up 38 percent y/y in 2021; tourism revenues up 130 percent y/y in 2021 (but only 38 percent of 2019 level). - Reserves: - End-2021 GIR: 107.7 percent of ARA metric; NIR: $1,725 million (program exchange rates); GIR: $4,272 million (market exchange rates). - GIR projected to fall to 79.4 percent of ARA metric in 2022; projected to rise to 98.0 percent by end-2027. - EBA-lite/REER assessments: external position in 2021 broadly in line with fundamentals, with caveats. ### Structural reforms, labor, and inclusion - Labor and education: - Conduct labor market survey (end-June 2023 SB). - Strengthen vocational education and training; improve teacher quality; develop professional orientation and transition programs. - Business environment and connectivity: - Improve IT infrastructure and human capital; accelerate digitalization. - Gradual requirement for corporations to publish audited financial statements based on IFRS. - Operationalize insolvency law; expand road network projects (East-West Highway, North-South Corridor). - SOE reforms and PIM: - Incorporate non-market SOEs into general government; publish and adopt comprehensive public corporation reform strategy (end-July 2022 SB); pilot implementation in three major SOEs (end-August 2022 SB). - Develop complementary support scheme for renewable power generation (end-July 2022 SB); until framework in place, refrain from initiating new PPAs or other forms of government support for renewable power projects. - PIM: require investment projects above GEL 20 million (2023 budget) to be selected according to PIM guidelines (end-December 2022 SB); amend budget code to subject investments above threshold to PIM (end-September 2022 SB); update Public Investment Management Assessment with TA (end-March 2023 SB). ### Program monitoring, TMU, and operational details - Quantitative performance criteria and indicative targets (select): - Ceiling on augmented cash deficit (GEL millions): End-June: 1,370; End-December: 2,740. - Floor on NIR of NBG (end-period stock, US$ million): End-June: 1,204; End-December: 840. - Indicative ceiling on primary current expenditures (GEL millions): End-June: 7,030; End-December: 14,210. - Inflation consultation bands (Table 1): - Central point: End-June 11.8 percent; End-December 8.1 percent. - Inner band (End-June): 13.8 / 9.8; (End-December): 10.1 / 6.1. - Outer band (End-June): 14.8 / 8.8; (End-December): 11.1 / 5.1. - TMU program exchange rates (as of March 15, 2022): - SDR: 1.37933 - GEL: 0.30939 (Equivalently, 1 US$ = 3.23220 GEL) - EUR: 1.09875 - Data and reporting commitments: regular monthly and quarterly reporting by Treasury, Ministry of Finance, NBG, Georgia Revenue Service, including VAT refund statistics and daily cash balances. _International Monetary Fund staff report: GEORGIA — REQUEST FOR A STAND-BY ARRANGEMENT (May 27, 2022)_ ### 14.3 percent of Georgia’s quota) immediately available. The Georgian authorities intend to ### GEORGIA: REQUEST FOR A STAND-BY ARRANGEMENT ### Context - The authorities intend to treat the new IMF arrangement as precautionary. - Program goals: further entrench macroeconomic stability, build resilience, and strengthen medium-term growth as Georgia emerges from the COVID-19 pandemic and contends with spillovers from the war in Ukraine. - The recovery from the pandemic is likely to slow due to Georgia’s vulnerability to spillovers from the war in Ukraine, which are also expected to increase inflation and widen the current account deficit. - Rebuilding fiscal buffers, while reducing debt and protecting the vulnerable, is a key priority. - Authorities target full compliance with the fiscal rule’s deficit ceiling by 2023. - Important fiscal measures highlighted: saving revenue overperformance, strengthening tax administration, streamlining tax expenditures, and developing a medium-term revenue strategy. - Public financial management strengthening and state-owned enterprise reform are recommended to mitigate fiscal risks. - The central bank’s monetary policy stance focuses on bringing down high inflation while maintaining exchange rate flexibility, strengthening reserves, and enhancing communication. - The authorities have required banks to adhere to international sanctions, which has limited risks. - Financial sector priorities: enhance financial safety nets, foster capital market development, and strengthen the AML/CFT framework. - Structural reform priorities: strengthen the business environment, enhance governance, advance education reform, strengthen active labor market policies, increase investment in information technology infrastructure, and accelerate digitalization. ### Recent economic developments and outlook - Real GDP: 2020: -6.8; 2021: 10.4; 2022 (preliminary): 3.2; 2023 (projection): 5.8. - Nominal GDP (in billion of laris): 2019: 49.3; 2020: 49.3; 2021: 60.2; 2022: 69.0; 2023: 77.0. - Nominal GDP (in billion of U.S. dollars): 2019: 17.5; 2020: 15.8; 2021: 18.7; 2022: 22.3; 2023: 24.2. - GDP per capita (in thousand of U.S. dollars): 2019: 4.7; 2020: 4.3; 2021: 5.0; 2022: 6.0; 2023: 6.5. - GDP deflator, period average: 2019: 4.9; 2020: 7.3; 2021: 10.6; 2022: 11.3; 2023: 5.3. - CPI, Period average: 2019: 4.9; 2020: 5.2; 2021: 9.6; 2022: 10.9; 2023: 5.1. - CPI, End-of-period: 2019: 7.0; 2020: 2.4; 2021: 13.9; 2022: 8.1; 2023: 3.4. - Current account balance (percent of GDP): 2019: -5.5; 2020: -12.4; 2021: -9.8; 2022: -10.9; 2023: -7.5. - Trade balance (percent of GDP): 2019: -21.4; 2020: -20.0; 2021: -20.1; 2022: -20.3; 2023: -19.6. - Gross international reserves (in billions of US$): 2019: 3.5; 2020: 3.9; 2021: 4.3; 2022: 3.3; 2023: 3.3. - Gross international reserves as percent of IMF Composite measure (floating): 2019: 101.1; 2020: 108.1; 2021: 107.7; 2022: 79.4; 2023: 74.9. - Gross external debt (percent of GDP): 2019: 87.7; 2020: 109.6; 2021: 98.2; 2022: 85.8; 2023: 80.6. ### Fiscal policy and public finances - Consolidated government operations (percent of GDP): - Revenue and grants: 2019: 27.1; 2020: 25.2; 2021: 25.4; 2022: 25.2; 2023: 25.3. - o.w. Tax revenue: 2019: 23.7; 2020: 22.3; 2021: 22.5; 2022: 22.8; 2023: 23.1. - Expenditures: 2019: 28.9; 2020: 34.5; 2021: 31.4; 2022: 29.1; 2023: 28.0. - Expense: 2019: 21.4; 2020: 26.3; 2021: 24.5; 2022: 21.7; 2023: 21.9. - Net acquisition of non-financial assets: 2019: 7.6; 2020: 8.2; 2021: 6.9; 2022: 7.4; 2023: 6.1. - Capital spending: 2019: 8.0; 2020: 8.6; 2021: 7.6; 2022: 8.0; 2023: 6.4. - Privatization proceeds: 2019: -0.4; 2020: -0.4; 2021: -0.7; 2022: -0.7; 2023: -0.3. - Net lending / borrowing after adjustment: 2019: -1.8; 2020: -9.3; 2021: -6.0; 2022: -3.9; 2023: -2.6. - Net budget lending: 2019: 0.2; 2020: 0.1; 2021: 0.1; 2022: 0.1; 2023: 0.2. - Augmented Net lending / borrowing (program definition) 1/: 2019: -2.1; 2020: -9.4; 2021: -6.1; 2022: -4.0; 2023: -2.8. - General government debt 2/: 2019: 40.4; 2020: 60.2; 2021: 49.5; 2022: 47.1; 2023: 45.8. - o.w. Foreign-currency denominated: 2019: 32.0; 2020: 47.6; 2021: 39.8; 2022: 37.5; 2023: 35.5. - Notes from budget execution Jan-Apr 2022 vs Jan-Apr 2021: - Revenues and grants Jan-Apr 2021: GEL 4,240 (7.0% of GDP); Jan-Apr 2022: GEL 5,565 (8.1% of GDP); difference: 1.1% of GDP. - Taxes Jan-Apr 2021: GEL 3,733 (6.2% of GDP); Jan-Apr 2022: GEL 5,060 (7.4% of GDP); difference: 1.2% of GDP. - Primary current spending Jan-Apr 2021: GEL 4,276 (7.1% of GDP); Jan-Apr 2022: GEL 4,654 (6.8% of GDP); difference: -0.3% of GDP. - Net lending / borrowing Jan-Apr 2021: -1,307 (-2.2% of GDP); Jan-Apr 2022: -475 (-0.7% of GDP); difference: 1.5% of GDP. - Nominal GDP Jan-Apr 2021: GEL 60,232; Jan-Apr 2022: GEL 68,412. ### Monetary policy and inflation - Headline inflation peaked in December 2021 at 13.9 percent (y/y) and declined by about 1 percentage point by April 2022, remaining well above the NBG’s 3 percent target. - Four-fifths of elevated inflation is due to high food, transportation, and utility prices. - Core inflation declined by almost 2 percentage points since its April 2021 peak of 6.9 percent (y/y). - The National Bank of Georgia increased its policy rate by a cumulative 300 basis points (to 11 percent) since March 2021. - The lari experienced initial sharp depreciation after the outbreak of the war in Ukraine, then recovered beyond its pre-war level; in May the NBG conducted its first auction to purchase foreign exchange since 2019. ### Financial sector developments and policy measures - Credit to the private sector (annual percent change): 2019: 20.7; 2020: 22.4; 2021: 12.4; 2022: 20.9; 2023: 11.6. - Credit in constant exchange rate: 2019: 16.1; 2020: 9.0; 2021: 18.2; 2022: 21.2; 2023: 9.9. - Broad money (annual percent change): 2019: 17.6; 2020: 24.6; 2021: 11.3; 2022: 19.9; 2023: 14.0. - Broad money in constant exchange rate (estimate): 2019: 14.3; 2020: 14.4; 2021: 15.4; 2022: 20.4; 2023: 11.8. - Broad money (excl. fx deposits): 2019: 18.8; 2020: 18.8; 2021: 17.8; 2022: 16.8; 2023: 14.6. - Despite monetary tightening, overall credit growth reached 18 percent (y/y) in March 2022, driven by pickup in foreign currency lending especially to corporates. - Macroprudential actions by the NBG: - Lowered the maximum maturity of mortgage loans (effectively tightening lending standards due to a payment-to-income (PTI) limit). - Recalibrated the currency-induced credit risk (CICR) buffer to assign higher risk weights to more dollarized loan portfolios. - Increased the income threshold below which a stricter PTI ratio applies (effective April 1). - Introduced a 3-percentage point interest rate shock in calculating PTI on floating interest rate loans (effective May 1). ### Program modalities and key policy actions - Program supported by a Stand-By Arrangement (SBA); authorities intend to treat it as precautionary. - Program envisages medium-term fiscal adjustment anchored on compliance with the fiscal rule by 2023 and maintaining a buffer to respond to shocks. - Fiscal revenue measures: strengthen tax administration; review tax expenditures; develop a medium-term revenue strategy to finance priorities such as capital spending and education. - Public financial management measures: reform state-owned enterprises; develop a framework to guide energy investment; update public investment management assessment. - Financial sector reforms (following up on FSAP recommendations): improve supervision; enhance financial safety net; address large exposures; improve data collection; strengthen AML/CFT regulations. - Structural reforms: focus on education and training to tackle high unemployment and address labor market mismatches. _International Monetary Fund staff report: GEORGIA — REQUEST FOR A STAND-BY ARRANGEMENT (May 27, 2022)_ ### 11. Banks’ liquidity ratios are above minimum requirements and asset quality has been ### 11. Banks’ liquidity ratios are above minimum requirements and asset quality has been ### Banking sector liquidity and asset quality - Banking sector liquidity coverage ratio was 118 percent as of April 2022; all banks are above the 100 percent minimum requirement. - Nonperforming loan (NPL) ratio declined from a peak of 8.3 percent in March 2021 to 5 percent in March 2022. - Restructured loans declined from a peak of 21.2 percent in February 2021 to 15.3 percent in March 2022. - The decline in NPLs has been broad-based; retail and auto dealer loans contributed the most. - On average, a fifth of loans to construction, real estate management companies, hotels, restaurants, and producers of consumer goods still exhibit signs of delinquency. - Foreign currency lending is not allowed for amounts below GEL 200,000. ### Impact of sanctions and correspondent banking - Authorities facilitated the unwinding of VTB Georgia’s operations after deposit pressures related to sanctions; assets and liabilities were transferred to two other smaller banks, avoiding broader financial-system spillovers. - The NBG required banks to adhere to sanctions, which has limited risks. - Some smaller banks lost correspondent relationships with Russian banks; the largest banks in Georgia retain western correspondent banking relationships and have provided services to customers of banks that no longer have such relationships. - Trade, remittance, and other transactions generally continue, including with unsanctioned Russian banks. - Some businesses were affected, including a large mineral water company that suspended operations after bank accounts were frozen; the government is considering acquiring a small amount of shares to reduce the majority owner’s stake to a minority one to facilitate resumed operations. ### Growth, inflation, and external outlook (projections and scenarios) - Growth: - Recovery moderated to around 3 percent in 2022 due to dissipating pent-up demand and headwinds from higher uncertainty and lower remittances. - Growth is expected to rebound to 5.8 percent in 2023, before easing to its medium-term potential of around 5 percent by 2024. - Inflation: - Inflation in 2022 is expected to average around 11 percent. - Inflation is expected to slowly converge to the NBG’s inflation target of 3 percent by 2024, assuming dissipating base effects and no emergence of second-round wage effects. - External position: - Current account deficit expected to widen to 10.9 percent in 2022, then gradually narrow to around 5½ percent of GDP in 2027. - Gross international reserves (GIR) expected to decline to close to 80 percent of the ARA metric in 2022 before gradually recovering to 98 percent in 2027. ### Risks and downside scenario implications - Key risks include deeper/protracted spillovers from the war in Ukraine, new highly contagious COVID-19 variants, further lari depreciation (given high dollarization), and domestic political uncertainty. - In a downside scenario where the war escalates and impacts persist (Annex III): - Slower exports, remittances, and tourism lower growth and import demand through 2024 while commodity prices rise. - Deteriorating global financial conditions result in capital outflows and tighter monetary policy. - Reserves would be expected to decline to around 62 percent of the ARA metric by end-2024. - Drawing on the proposed program would boost reserves by about 6 percentage points of the ARA metric, bringing them to around 72 percent of the ARA metric by the end of the program. - A program would signal commitment to credible policies and could catalyze additional donor financing to further boost reserves. ### Program objectives and major policy pillars - The proposed program focuses on: - (i) the 2022 budget deficit and the medium-term fiscal path to comply with the fiscal rule and create policy space, improving public investment management, and strengthening revenue generation; - (ii) reducing fiscal risks including by advancing state-owned enterprise (SOE) reform; - (iii) maintaining a sufficiently tight monetary stance and further enhancing financial sector resilience; and - (iv) undertaking medium-term structural measures to strengthen labor market participation. - The program aims to support a gradual reduction of the large current account deficit, achievement of the inflation target, and greater fiscal and financial sector resilience. ### Fiscal stance and budget measures (2022 and medium term) - The 2022 budget under the program implies a deficit of 4.0 percent of GDP, reflecting a 1.8 percentage point of GDP increase in the cyclically adjusted primary balance vis-à-vis 2021. - The authorities plan to increase targeted support to vulnerable households and subsistence farmers by around 0.2 percent of GDP; this will be financed by higher expected revenues and spending reprioritization and will not affect the deficit. - Primary current spending is expected to decline by 2.6 percent of GDP, mostly due to unwinding temporary COVID-19 support (2.5 percent of GDP) and lower goods and services expenditure. - Capital spending is expected to reach 8 percent of GDP to finance ongoing infrastructure projects. - The budget envisages a 10 percent increase in the basic public sector salary. - Tax revenue boosts expected from COVID-related personal income tax and property tax exemptions rolling-off (estimated at 0.4 percent of GDP) and strong corporate income tax performance (CIT revenues over January–April 2022 grew over 60 percent y/y). ### Revenue mobilization and tax administration reforms - Authorities plan to mobilize additional revenue by: - Strengthening tax administration: finalizing the new audit case management system, applying key performance indicators for large taxpayers, creating a register of employees for tax administration, and increasing automatic access to third-party information. - Reviewing tax expenditures: amend the budget code to make annual tax expenditure reporting legally binding (end-September 2022 SB), publish a first tax expenditure report (end-December 2022 SB), and prepare cost-benefit analysis for key tax expenditures (end-June 2023 SB). - Developing a Medium-Term Revenue Strategy (MTRS) with IMF TA (end-September 2023 SB). ### VAT refunds and liquidity support to the private sector - The authorities committed to automatically process at least 90 percent of new VAT credit claims measured as both the number and value of declarations within 30 calendar days (end-July 2022 and end-January 2023 SBs). - They will reduce the stock of audited VAT declarations cleared for payment to no more than GEL 50 million (end-December 2022 SB). ### SOE reform, public investment management, and energy sector measures - SOE reform: - Authorities committed to incorporate non-market SOEs into the general government and reform public corporations to strengthen corporate governance and transparency. - A draft comprehensive reform strategy has been prepared and published by the Ministry of Finance; final strategy adoption (end-July 2022 SB) and a timebound implementation plan including piloting in three major SOEs (end-August 2022 SB) are expected. - Prior action: MoF decree requiring MoF approval for key financial governance decisions and statements of corporate intent for major public corporations. - Power generation and fiscal risk: - Authorities intend to develop a complementary support scheme for renewable power generation (end-July 2022 SB) to limit fiscal risks; until the framework is in place, authorities committed not to initiate new PPAs and other forms of government support for renewable power projects. - Public Investment Management (PIM): - 2023 budget decree requires all investment projects above GEL 20 million in the 2023 budget be selected according to PIM guidelines (end-December 2022 SB). - Authorities will submit an amendment to the budget code to make all investments above a threshold (to be identified with TA) subject to the PIM framework (end-September 2022 SB). - Update the Public Investment Management Assessment with TA (end-March 2023 SB), including a climate-related assessment. - Fiscal Risks Statement (FRS): - Authorities will expand the FRS to address medium-to-long term risks from climate change, health and aging-related spending, and legal disputes (end-December 2022 SB). *Source: 1geoea2022002 — https://www.imf.org/-/media/files/publications/cr/2022/english/1geoea2022002.pdf* ### 25. A moderately tight monetary policy stance is appropriate and further tightening may ### 25. A moderately tight monetary policy stance is appropriate and further tightening may be needed ### Monetary policy stance and inflation outlook - Prior to the Russian invasion of Ukraine, high interest rate differential between local and foreign currency deposits and some lari appreciation suggested interest rate increases (to highest nominal rates since 2008) would be effective. - Inflation has remained high reflecting global developments; spillovers from sanctions on Russia are likely to put additional pressure on inflation. - The NBG recognizes the risk that transient inflation developments could become entrenched in inflation expectations and stands ready to tighten interest rates further if needed (MEFP ¶14). - If higher lari rates make borrowing or refinancing in foreign currency more attractive, the NBG’s macroprudential tools will help limit financial sector risks. ### Readiness to tighten policy to achieve the inflation target - Short-term drivers making above-target inflation inevitable: rising global commodity prices, base effects, and potential renewed depreciation pressures. - Preserving NBG credibility is paramount; the NBG should be prepared to tighten rates further if: - inflation expectations or core inflation begin to accelerate, or - there are signs of rising wage pressures. - Higher rates would: - signal the NBG’s strong commitment to its inflation target, - increase incentives to save in domestic currency, - have a positive effect on capital flows, helping mitigate external vulnerabilities. - The NBG is committed to update its communication strategy including through regular impact assessments (end-December 2022 SB). ### Exchange rate flexibility and reserve targets - The NBG remains committed to exchange rate flexibility and strengthening foreign exchange reserve coverage over the medium term. - Georgia’s external position in 2021 is estimated to be in line with the level implied by fundamentals and desirable policies (Annex IV). - Recent actions and projections: - The NBG purchased a small amount of reserves in early 2022. - Proposed net international reserves (NIR) targets for 2022 are consistent with a significant decrease of gross international reserves to close to 80 percent of the ARA metric. - A gradual increase in nominal reserves would keep coverage at 75 percent of the ARA metric by the end of the program before rising in subsequent years (MEFP ¶18). - The initial weakening of reserve coverage (ARA metric) reflects: - lower official external loans following a sharp increase during the pandemic, - reliance more on domestic financing (decreasing external vulnerabilities), - rapid growth of the ARA metric denominator. - If current shocks are less severe than expected, authorities would seek faster progress in strengthening reserves. ### Financial sector strengths and risks - Strengths: - Robust supervisory and regulatory framework, including implementation of Basel III recommendations and recalibrated macroprudential measures. - Banking system emerging from the pandemic is profitable; capital and liquidity levels are healthy; asset quality is improving. - Risks: - High pace of credit growth coupled with increasing debt burdens for households and corporates could create challenges amid rising policy rates, risk, and term premiums. - Spillovers from the war in Ukraine or renewed COVID-19 challenges could weaken recovery in tourism, restaurants, and real estate. - Geopolitical risks could raise bank funding costs in foreign markets; larger-than-expected increases in advanced economy interest rates might affect FX flows and bank funding. ### Authorities’ financial sector reform program and specific actions - Reform focus areas (drawing on FSAP recommendations): improve governance of supervisory decision-making, enhance financial safety net, improve data collection, foster capital market development, strengthen AML/CFT regulations (MEFP ¶21–23, 26, 31). - Specific actions and timelines: - Closely monitor NPLs and restructured loans to ensure prompt provisioning and write-downs; emphasize adequate loan loss reserves and benefits of retaining earnings by minimizing payments to shareholders and staff bonuses. - Recalibrated macroprudential tools to address FX loan demand and credit growth (see ¶10). - Plan to fully implement large exposure limits by June 2022. - Codify General Risk Assessment Program and update guidelines for supervisory assessments (end-June 2022 SB). - Implement a prompt corrective action framework for banks by developing policy guidance (end-December 2022 SB); draft a playbook to make the bridge bank tool operational (end-March 2023 SB); prepare crisis contingency plans for banks. - Enhance data collection via memorandums of understanding with the Georgia Revenue Service and the Public Registry; develop additional data fields for climate risk assessment and publish an assessment of climate-related financial sector risks (end-December 2022 SB). - Encourage capital market development including draft legislation on dematerialized securities holdings and covered bonds. - Implement FATF recommendations and MONEYVAL fifth round recommended actions, focusing on regulation and supervision for the gaming sector, virtual asset service providers, and real estate agents. - Expected outcome: Robust financial sector approach plus sustained sound macroeconomic policies should help reduce still-high dollarization and related vulnerabilities over time. ### Labor market, education, and structural reforms for inclusive growth - Labor market challenges: - Persistently high unemployment relative to peers. - Prior to the pandemic, unemployment decline was matched by a drop in labor force participation. - Rebound from the pandemic shows slight increase in labor force participation although unemployment also rose. - Authorities’ planned actions: - Undertake a comprehensive survey of labor demand and skills needs (end-June 2023 SB) to inform labor market policies. - Raise quality of education and active labor market policies—particularly vocational education and training. - Improve qualification standards for teachers and develop professional orientation and transition programs. - Ministry of Education and Science to work with private sector to design vocational programs tailored to business hiring needs. - Business environment and connectivity: - Improve IT infrastructure and human capital to catalyze digitalization. - Gradual requirement for corporations to publish audited financial statements based on IFRS standards. - Operationalization of the insolvency law modernizes and strengthens the insolvency framework. - Progress on expanding road networks (East-West Highway and North-South Corridor) and free trade agreements (for example, India, Israel, Republic of Korea, the UAE and other GCC countries). ### Program modalities: SBA design, financing, and monitoring - Program length and access: - Proposed three-year SBA would provide access of 100 percent of quota (SDR 210.4 million) phased equally over the duration of the program (Table 6). - Program intended as precautionary; under a plausible adverse scenario drawing on the program would allow authorities to maintain reserves at around 70 percent of the ARA metric (Annex III). - Program monitored via semi-annual reviews. - Financing and capacity to repay: - Adequate financing in place for the next 12 months and good prospects for financing for the full period of the arrangement (Table 2). - Debt service manageable, even under downside scenarios. - If all drawings are made and an adverse scenario materializes (Annex III), obligations from lending programs would reach 0.7 percent of GDP in 2027 (1.4 percent of exports and 5.2 percent of gross international reserves) (Table 7). - Although Georgia’s share of foreign currency debt is high, risks are mitigated by long maturities and large share owed to official creditors (Annex II). - Authorities’ capacity to repay is adequate. - Program monitoring instruments: - Inflation consultation clause (ICC) set symmetrically around projected 12-month percentage change in headline inflation. - Quantitative performance criteria (PCs) include ceilings and floors on various fiscal and reserve metrics and continuous PCs on accumulation of external debt arrears and new public guarantees. An indicative ceiling on current primary spending and an indicative target on accumulation of general government domestic expenditure arrears are included. - Structural benchmarks focus on controlling fiscal risks via SOE reforms and enhancing public financial management, following up on 2021 FSAP recommendations. ### Risks, safeguards, and staff appraisal - Risks to program: - Challenging external and domestic political environment and ongoing pandemic increase risk of further shocks, policy slippages, and reform fatigue. - Mitigation: authorities’ strong track record delivering reforms under the previous EFF program and view of the SBA as an anchor for credible policies. - An updated safeguards assessment of the NBG will be completed by the time of the first review of the program. - Staff appraisal highlights: - Georgian economy resilient to COVID-19 but faces new challenges; recovery exceeded expectations but is likely to be slowed by spillovers from the war in Ukraine, which will also raise inflation and widen the current account deficit. - Proposed SBA provides a framework to address macroeconomic challenges and advance reforms: entrench macroeconomic stability, rebuild fiscal buffers, strengthen public financial management, reduce external vulnerabilities, achieve inflation target, enhance financial sector resilience, and strengthen medium-term growth. - Authorities have demonstrated commitment through the 2022 budget, monetary policy tightening, and adjustment of macroprudential tools. - Implementation of the 2022 budget will help make progress toward compliance with the fiscal rule; intent to save revenue overperformance helps put compliance with the deficit ceiling by 2023 in reach. - Early action to increase fiscal space recommended: strengthen tax administration, review and streamline tax expenditures, and develop a comprehensive medium-term revenue strategy. - SOE reform critical to mitigate fiscal risks: adopt strategy consistent with best practices, strengthen Ministry of Finance oversight, pilot implementation in three major SOEs, and anchor new governance model in law. - The NBG should persevere in efforts to bring inflation back to target while maintaining the flexible exchange rate regime and be prepared to increase rates further to avoid entrenchment of higher inflation expectations. - Continue enhancing financial safety nets (including bridge bank arrangements) and governance of supervisory decision-making; continue using macroprudential toolkit to address risks including those from foreign currency lending. - Reinvigorated structural reform agenda needed to support stronger, more inclusive growth; further investments in physical and information technology infrastructure and accelerating digitalization are priorities. *Source: IMF staff report (chapter text provided).* ### 45. Staff supports the authorities’ request for approval of the three-year Stand-By ### 45. Staff supports the authorities’ request for approval of the three-year Stand-By ### Program endorsement and purpose - Staff supports the authorities’ request for approval of the three-year Stand-By Arrangement. - The program provides: - a strong anchor for disciplined macroeconomic policies; - a signal of policy credibility to donors and foreign investors; - a valuable source of financing in case downside risks materialize. ### Real sector developments and outlook - The COVID-19 crisis and large economic contraction: - increased absolute poverty (absolute poverty data up to 2020). - raised already high unemployment while depressing labor force growth. - Employment loss was driven by construction, hospitality and trade industries. - Flash estimates suggest a dramatic rebound in GDP growth. - Inflation developments: - Sharply higher inflation reflects the removal of utility subsidies, and rising food and commodity prices. - CPI, Period average and End-of-period (Table 1): - CPI, Period average: 2019: 4.9; 2020: 5.2; 2021: 9.3; 2021 Article IV Prel.: 9.6; 2022: 10.9; 2023: 5.1; 2024–2027: 3.0 (each year). - CPI, End-of-period: 2019: 7.0; 2020: 2.4; 2021: 13.1; 2021 Article IV Prel.: 13.9; 2022: 8.1; 2023: 3.4; 2024–2027: 3.0 (each year). - Core CPI, End-of-period reported as 5.2 (2019), 5.3 (2020), "..." (other entries). - Real GDP and projections (Table 1): - Real GDP: 2019: 5.0; 2020: -6.8; 2021: 7.7; 2021 Article IV Prel.: 10.4; 2022: 3.2; 2023: 5.8; 2024: 5.2; 2025: 5.2; 2026: 5.2; 2027: 5.2. - Output Gap: 2019: -0.6; 2020: -5.2; 2021: -1.0; 2021 Article IV Prel.: -0.4; 2022: -0.2; 2023: 0.3; 2024–2027: 0.0 (each year). - Nominal GDP (in billion of laris): 2019: 49.3; 2020: 49.3; 2021: 57.5; 2021 Article IV Prel.: 60.2; 2022: 69.0; 2023: 77.0; 2024: 83.3; 2025: 90.3; 2026: 97.8; 2027: 106.0. - Nominal GDP (in billion of U.S. dollars): 2019: 17.5; 2020: 15.8; 2021: 17.8; 2021 Article IV Prel.: 18.7; 2022: 22.3; 2023: 24.2; 2024: 26.6; 2025: 29.2; 2026: 31.9; 2027: 35.0. - GDP per capita (in thousand of U.S. dollars): 2019: 4.7; 2020: 4.3; 2021: 4.8; 2021 Article IV Prel.: 5.0; 2022: 6.0; 2023: 6.5; 2024: 7.2; 2025: 7.9; 2026: 8.7; 2027: 9.6. - Rapid GDP estimates and labor series depicted in figures (text summary only; specific quarterly series shown in figures). ### External sector developments and outlook - Net money transfers: - The increase in net money transfers has been sustained (Figure 2). - Net Money Transfers (US$ million) series shown in figure (index from Mar-18 to Mar-22). - Goods trade balance: - The goods trade balance has started to deteriorate (Figure 2). - Goods Trade Balance (US$ million) series shown (Mar-18 to Mar-22). - Tourism and services: - Hotel reservations and number of flights rebounded before moderating recently. - Major sources of tourism remain well below pre-COVID-19 levels. - Tourism/travel revenue (Table 2, Services: credit — tourism/travel revenue): - 2019: 3,269; 2020: 542; 2021: 1,245; 2022: 2,016; 2023: 3,301; 2024: 3,743; 2025: 4,130; 2026: 4,498; 2027: 4,901. - Gross international reserves and external borrowing: - Gross international reserves reached a record high, even as the NBG sold FX in 2020-2021, supported by external borrowing (including IMF and donor financing). - Gross international reserves (in billions of US$) (Table 1): - 2019: 3.5; 2020: 3.9; 2021: 3.8; 2021 Article IV Prel.: 4.3; 2022: 3.3; 2023: 3.3; 2024: 3.5; 2025: 3.9; 2026: 4.4; 2027: 5.3. - In percent of ARA metric: 2019: 101.1; 2020: 108.1; 2021: 98.5; 2021 Article IV Prel.: 107.7; 2022: 79.4; 2023: 74.9; 2024: 74.7; 2025: 80.5; 2026: 85.4; 2027: 98.0. - Balance of payments highlights (Table 2, selected lines, in millions of U.S. dollars): - Current account balance: 2019: -960; 2020: -1,966; 2021: -1,834; 2022: -2,435; 2023: -1,813; 2024: -1,684; 2025: -1,694; 2026: -1,811; 2027: -1,968. - Trade balance (goods): 2019: -3,736; 2020: -3,165; 2021: -3,758; 2022: -4,509; 2023: -4,746; 2024: -4,694; 2025: -4,921; 2026: -5,304; 2027: -5,637. - Exports: 2019: 4,944; 2020: 4,347; 2021: 5,539; 2022: 5,567; 2023: 6,336; 2024: 7,626; 2025: 8,590; 2026: 9,563; 2027: 10,718. - Imports: 2019: 8,681; 2020: 7,512; 2021: 9,297; 2022: 10,076; 2023: 11,083; 2024: 12,320; 2025: 13,511; 2026: 14,867; 2027: 16,355. - Services: credit: 2019: 4,600; 2020: 1,580; 2021: 2,547; 2022: 3,365; 2023: 4,711; 2024: 5,297; 2025: 5,989; 2026: 6,644; 2027: 7,416. - Remittances (Table 2, "Of which: remittances"): 2019: 916; 2020: 1,168; 2021: 1,609; 2022: 1,401; 2023: 1,761; 2024: 1,778; 2025: 1,787; 2026: 1,832; 2027: 1,833. ### Fiscal sector developments and projections - COVID-19 increased general government debt, which remains primarily FX denominated. - Composition of external debt (percent total) (Table 1, composition snapshot): - Multilateral: 72.2 - Bilateral: 21.2 - Eurobond: 6.6 - Note: data up to March 2022. - Government debt and projections (Table 1): - General government debt (percent of GDP): 2019: 40.4; 2020: 60.2; 2021: 54.2; 2021 Article IV Prel.: 49.5; 2022: 47.1; 2023: 45.8; 2024: 44.3; 2025: 42.9; 2026: 41.6; 2027: 40.5. - Foreign-currency denominated share of government debt (percent of GDP): 2019: 32.0; 2020: 47.6; 2021: 43.9; 2021 Article IV Prel.: 39.8; 2022: 37.5; 2023: 35.5; 2024: 33.1; 2025: 30.7; 2026: 27.8; 2027: 26.2. - Revenue and expenditures (Table 1 and Tables 3a/3b): - Revenue and grants (percent of GDP): 2019: 27.1; 2020: 25.2; 2021: 25.7; 2021 Article IV Prel.: 25.4; 2022: 25.2; 2023: 25.3; 2024: 25.4; 2025: 25.4; 2026: 25.3; 2027: 25.2. - Tax revenue (percent of GDP): 2019: 23.7; 2020: 22.3; 2021: 22.9; 2021 Article IV Prel.: 22.5; 2022: 22.8; 2023: 23.1; 2024: 23.3; 2025: 23.4; 2026: 23.4; 2027: 23.4. - Expenditures (percent of GDP): 2019: 28.9; 2020: 34.5; 2021: 32.2; 2021 Article IV Prel.: 31.4; 2022: 29.1; 2023: 28.0; 2024: 28.0; 2025: 27.9; 2026: 27.7; 2027: 27.5. - Capital spending reached a record high in 2020 both in GEL and as a share of GDP despite COVID-19. Capital spending (percent of GDP): 2019: 8.0; 2020: 8.6; 2021: 8.0; 2021 Article IV Prel.: 7.6; 2022: 8.0; 2023: 6.4; 2024: 6.3; 2025: 6.3; 2026: 6.1; 2027: 5.9. - Net lending / borrowing after adjustment (percent of GDP, Table 1): 2019: -1.8; 2020: -9.4; 2021: -6.6; 2021 Article IV Prel.: -6.1; 2022: -4.0; 2023: -2.8; 2024: -2.3; 2025: -2.3; 2026: -2.2; 2027: -2.1. - Augmented Net lending / borrowing (program definition) (percent of GDP): 2019: -2.1; 2020: -9.4; 2021: -6.6; 2021 Article IV Prel.: -6.1; 2022: -4.0; 2023: -2.8; 2024: -2.3; 2025: -2.3; 2026: -2.2; 2027: -2.1. ### Financial sector and banking system developments - Private sector credit growth remained robust on account of local currency credit. - Credit to the private sector (percent change, Table 1): 2019: 20.7; 2020: 22.4; 2021: 10.5; 2021 Article IV Prel.: 12.4; 2022: 20.9; 2023: 11.6; 2024: 8.1; 2025: 8.5; 2026: 8.3; 2027: 8.4. - In constant exchange rate: 2019: 16.1; 2020: 9.0; 2021: 14.0; 2021 Article IV Prel.: 18.2; 2022: 21.2; 2023: 9.9; 2024: 8.7; 2025: 8.9; 2026: 8.7; 2027: 8.8. - NPLs and watch loans have declined to levels close to those observed early in the pandemic. - Nonperforming to total gross loans (IMF definition) (Table 5): Dec-2019: 1.9; Dec-2020: 2.3; Dec-2021: 2.4; Mar-2022: 2.2; Jun-2022: 2.2; Sep-2022: 1.9; Dec-2022: 1.8; Mar-2022 (Q1): 1.8. - Nonperforming to total gross loans (NBG definition) (Table 5): Dec-2019: 4.4; Dec-2020: 8.2; Dec-2021: 8.3; Mar-2022: 6.7; Jun-2022: 6.0; Sep-2022: 5.2; Dec-2022: 5.0; Mar-2022 (Q1): 5.0. - Bank profitability recovered to pre-crisis levels: - Return on assets (ROA) (Table 5): Dec-2019: 2.4; Dec-2020: 0.1; Dec-2021: 2.8; Mar-2022: 4.0; Jun-2022: 4.1; Sep-2022: 3.9; Dec-2022: 3.1. - Return on equity (ROE) (Table 5): Dec-2019: 20.3; Dec-2020: 1.4; Dec-2021: 29.4; Mar-2022: 37.3; Jun-2022: 37.3; Sep-2022: 34.4; Dec-2022: 24.8. - Dollarization and interest differentials: - Deposit dollarization (percent of total) (Table 1): 2019: 64.0; 2020: 61.4; 2021: 66.7; 2021 Article IV Prel.: 59.9; 2022: 60.0; 2023: 59.4; 2024: 58.9; 2025: 58.3; 2026: 57.8; 2027: 57.2. - Credit dollarization (percent of total) (Table 1): 2019: 55.4; 2020: 55.7; 2021: 55.0; 2021 Article IV Prel.: 50.9; 2022: 50.9; 2023: 50.9; 2024: 49.9; 2025: 48.9; 2026: 47.9; 2027: 46.9. - Financial Soundness Indicators (Table 5, selected items): - Capital to risk-weighted assets (Basel III): Dec-2019: 19.5; Dec-2020: 17.6; Dec-2021: 18.2; Mar-2022: 19.2; Jun-2022: 19.1; Sep-2022: 19.6; Dec-2022: 20.1. - Liquidity coverage ratio (GEL, percent): Dec-2019: 100.8; Dec-2020: 120.3; Dec-2021: 117.8; Mar-2022: 108.9; Jun-2022: 103.1; Sep-2022: 115.1; Dec-2022: 104.8. - Deposit dollarization (total non-bank deposits) (Table 5): Dec-2019: 64.0; Dec-2020: 61.4; Dec-2021: 63.5; Mar-2022: 60.0; Jun-2022: 60.7; Sep-2022: 59.9; Dec-2022: 59.4. ### IMF financing, reviews, and Fund credit indicators - Proposed Schedule of Reviews and Available Purchases (Table 6): - 15-Jun-22: Approve the 36-month SBA — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 3-Oct-22: Complete the first review based on end-June 2022 performance criteria — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 3-Apr-23: Complete the second review based on end-December 2022 performance criteria — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 2-Oct-23: Complete the third review based on end-June 2023 performance criteria — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 1-Apr-24: Complete the fourth review based on end-December 2023 performance criteria — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 7-Oct-24: Complete the fifth review based on end-June 2024 performance criteria — Amount of Purchase: 30.0 SDR millions (14.3 percent of quota). - 7-Apr-25: Complete the sixth review based on end-December 2024 performance criteria — Amount of Purchase: 30.4 SDR millions (14.4 percent of quota). - Total available: 210.4 SDR millions (100.0 percent of quota). - Indicators of Fund Credit (Table 7, selected aggregates, in millions of SDR): - Stock of existing Fund credit (end period) (Stock 1/): 2019: 180.0; 2020: 406.0; 2021: 481.5; 2022: 469.0; 2023: 446.5; 2024: 404.3; 2025: 330.1; 2026: 249.4; 2027: 171.2. - Prospective purchases (Stock 2/ end of period): 2022: 60.1; 2023: 120.2; 2024: 180.3; 2025: 202.9; 2026: 165.4; 2027: 97.9. - Stock of existing and prospective Fund credit (Stock 2/): 2019: 180.0; 2020: 406.0; 2021: 481.5; 2022: 529.1; 2023: 566.7; 2024: 584.6; 2025: 533.0; 2026: 414.8; 2027: 269.1. - In percent of quota (Stock of existing and prospective Fund credit): 2019: 85.6; 2020: 193.0; 2021: 228.8; 2022: 251.5; 2023: 269.4; 2024: 277.8; 2025: 253.3; 2026: 197.2; 2027: 127.9. - In percent of GDP (Stock of existing and prospective Fund credit): 2019: 1.4; 2020: 3.6; 2021: 3.7; 2022: 3.5; 2023: 3.5; 2024: 3.4; 2025: 2.8; 2026: 2.0; 2027: 1.2. - Obligations to the Fund from existing and prospective Fund credit (in millions of SDR): 2019: 38.1; 2020: 4.2; 2021: 4.2; 2022: 17.7; 2023: 34.0; 2024: 55.4; 2025: 96.0; 2026: 129.1; 2027: 151.6. - Notes on assumptions: Although authorities intend the arrangement to be precautionary, indicators are computed assuming the adverse scenario outlined in Annex III and purchases phased equally over the duration of the program (except in 2022 where a purchase of SDR 60.1 million is assumed in October 2022). *Source: National authorities; National Bank of Georgia; Ministry of Finance; Haver; Geostat; and IMF staff estimates and calculations.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Conjunctural Risks: war, commodity prices, pandemic - Russia’s invasion of Ukraine leads to escalation of sanctions and other disruptions. Sanctions on Russia are broadened to include oil, gas, and food sectors. Russia is disconnected almost completely from the global financial system and large parts of the trading system. This, combined with Russian countersanctions and secondary sanctions on countries and companies that continue business with Russia, leads to even higher commodity prices, refugee migration, tighter financial conditions, and other adverse spillovers, which particularly affect LICs and commodity-importing EMs. - Likelihood: High - Expected Impact on the Economy if Risks Materialize: High - Expected domestic effects: lower exports, remittances, and investment; increase inflation and depreciation pressure on the lari; elevated domestic food insecurity; increased migration of refugees with social tensions and fiscal costs; AML/CFT compliance risks for financial institutions. - Policy Response: - Allow flexible exchange rate to act as a shock absorber. - Utilize foreign exchange reserves to prevent disorderly market conditions that could jeopardize financial stability. - Maintain tight monetary policy to keep inflation expectations anchored and avoid capital outflows. - Reprioritize spending to provide targeted fiscal support to the most vulnerable segments of the population and affected industries. - Seek external official support should a larger fiscal response be necessary and to bolster foreign exchange reserves. - Seek new markets to diversify exports. - Strengthen AML/CFT compliance monitoring. - Rising and volatile food and energy prices. Commodity prices are volatile and trend up amid supply constraints, war in Ukraine, export restrictions, and currency depreciations. This leads to short-run disruptions in the green transition, bouts of price and real sector volatility, food insecurity, social unrest, and acute food and energy crises (especially in EMDEs with lack of fiscal space). - Likelihood: High - Expected Impact on the Economy if Risks Materialize: High - Expected domestic effects: further increase inflationary pressures and diminish households’ purchasing power. - Policy Response: - Maintain tight monetary policy to keep inflation expectations anchored. - Reprioritize spending to provide targeted fiscal support to the most vulnerable. - Seek external official support should a larger fiscal response be necessary and to bolster foreign exchange reserves. - Outbreaks of lethal and highly contagious Covid-19 variants. Rapidly increasing hospitalizations and deaths due to low vaccine protection or vaccine-resistant variants force more social distancing and/or new lockdowns. This results in extended supply chain disruptions and a reassessment of growth prospects, triggering capital outflows, financial tightening, currency depreciations, and debt distress in some EMDEs. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Expected domestic effects: further lockdowns negatively affect growth (including through lower tourism and investment); capital outflows in the context of a high current account deficit and external financing requirements would lead to lari depreciation and accelerating inflation; poverty among the vulnerable would rise. - Policy Response: - Allow the exchange rate to adjust to new fundamentals. - Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability. - Further tighten monetary policy to keep inflation expectations anchored. - Reprioritize spending to meet health needs and provide targeted support to affected populations and businesses. ### Structural Risks: global fragmentation and deglobalization - Geopolitical tensions and deglobalization. Intensified geopolitical tensions, security risks, conflicts, and wars cause economic and political disruptions, fragmentation of the international monetary system, production reshoring, a decline in global trade, and lower investor confidence. - Likelihood: High - Expected Impact on the Economy if Risks Materialize: High - Expected domestic effects: lower exports, remittances, and investment; sustained price pressures and increased depreciation pressure on the lari; higher inflation despite weaker growth; weakening of Georgia’s potential role as a logistics hub. - Policy Response: - Allow the exchange rate to reflect the new fundamentals. - Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability. - Reprioritize spending to provide targeted fiscal support to individuals and businesses. - Undertake structural reforms to promote new sources of growth less reliant on the external environment, and seek to diversify export destinations. ### Georgia-specific Structural Risks: financial, fiscal, political - Financial risks. As a result of one of the global shocks above, the exchange rate could depreciate rapidly, undermining confidence in the currency and increasing inflation expectations. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: Medium - Expected domestic effects: depreciation in a highly dollarized economy could hurt growth and threaten financial stability as households and firms struggle to repay loans; higher inflation and depreciation expectations could result in a vicious cycle of loan conversions putting further pressure on the currency. - Policy Response: - Maintain tight monetary policy to ensure confidence in the currency and keep inflation expectations anchored. - Allow the exchange rate to adjust to new fundamentals. - Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability. - Strengthen the resolution framework to ensure that financial stability challenges can be addressed. - Allow use of capital and liquidity buffers to cope with shocks. - Adjust macroprudential measures to avoid an undue tightening of financial conditions. - Enforce provisioning rules in line with international best practices. - Fiscal risks. Materialization of contingent liabilities/fiscal risks could put pressure on the deficit. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: High - Expected domestic effects: need to cover contingent liabilities could complicate efforts to comply with the fiscal rule or result in lower capital or current spending, the latter of which has already been significantly compressed. - Policy Response: - Continue improving SOE governance and fiscal risk management practices. - Strengthen revenue raising capacity. - Strengthen reform agenda and seek IFI support. - Political risks. Political instability and/or reform fatigue could undermine efforts to undertake structural reforms. - Likelihood: Medium - Expected Impact on the Economy if Risks Materialize: Medium - Expected domestic effects: policy uncertainty could undermine confidence and hurt growth. - Policy Response: - Maintain macroeconomic policy discipline. - Strengthen social safety nets to protect the most vulnerable segments of the population and ensure that growth is sufficiently inclusive. *Prepared by Sergejs Saksonovs, Shujaat Khan, and Masud Al-Taj.* ### Annex II. Debt Sustainability Assessment ### Overall assessment and trajectory - Georgia’s public debt is assessed as sustainable, with fiscal consolidation and higher growth expected to put the public debt-to-GDP ratio on a downward path after a sharp rise in 2020 due to the COVID-19 pandemic. - After peaking at the fiscal rule limit of 60 percent of GDP in 2020, public debt dropped by 10 percentage points in 2021 and is expected to decline further to close to 40 percent of GDP by 2027. - Authorities’ plan to expand coverage of fiscal reporting to include non-market SOEs in the general government will add to the projected stock of debt starting in 2022, but adequate buffers safeguard compliance with the fiscal rule debt ceiling. - External debt would decline steadily from about 98 percent of GDP in 2021 under the baseline and would be near or below this level under all standard shock scenarios through the projection horizon. - Main risks to both public and external debt stem from the high share of foreign exchange denominated debt. ### Key findings (numbered and exact) 1. Public debt-to-GDP increased sharply in 2020 after an extended period of stability. - Gross public debt remained stable at around 40 percent of GDP during 2016-19. - In 2020, debt increased by 20 percentage points of GDP, reaching the upper limit of the fiscal rule. - Contributing factors in 2020: widening of the fiscal deficit; government’s fiscal response package (3.8 percent of GDP in 2020); accumulation of government deposits (which increased by 3.6 percent of GDP); economic contraction; exchange rate depreciation; other residual debt-increasing factors. 2. After a sharp fall in 2021, public debt as a share of GDP is expected to continue to decline over the medium term and remains sustainable. - Public debt-to-GDP ratio declined by 10 percentage points in 2021, driven by higher growth, exchange rate appreciation, and lower real interest rate effects. - In 2027, public debt is projected to return to its pre-pandemic level of close to 40 percent of GDP in gross terms (38 percent of GDP measured net of government deposits). - Gross financing needs are expected to average 6 percent of GDP over 2022-27. 3. Public debt is projected to comply with Georgia’s Liberty Act. - Fiscal rule: 60 percent ceiling on gross general government debt to be attained by 2023 (within three years of the escape clause being triggered due to the pandemic). - Georgia’s 2023 public debt is currently projected at 46 percent of GDP under the baseline. - After including non-market SOEs and PPP liabilities, debt is estimated to reach 48 percent of GDP in 2023, still complying with the fiscal rule limit. - Government deposits projected at 2.5 percent of GDP provide additional cushion. - Fiscal risks from incorporating non-market SOEs, PPP liabilities, and contingent liabilities (PPAs and SOEs) could add to projected debt. 4. Public debt remains sustainable in all standardized stress tests. - Debt remains below high-risk thresholds in standardized macro-fiscal stress tests (real GDP growth, primary balance, real interest rate, real exchange rate shocks). - Under the constant primary balance scenario (at 2021 levels) debt would not stabilize, but the scenario is considered unrealistic. - Under a combined macro-fiscal shock of low growth, inflation, a deteriorated primary balance, and high interest rates, debt stabilizes at a level that breaches the benchmark threshold; such a scenario would also breach Georgia’s fiscal rule absent policy response. 5. After a successful Eurobond rollover in April 2021, risks associated with high gross financing needs remain low, while vulnerabilities stem mostly from a high share of FX-denominated debt. - Currently, 80 percent of public debt is FX-denominated. - A $500 million sovereign Eurobond maturing on April 12, 2021 was refinanced at a historically low interest rate (2.75 percent coupon rate for 5-year maturity). - Government has secured long maturity debt (representing over 97 percent of outstanding debt). - Public debt service profile averages 5 percent of GDP over 2022-27. - Much of the external debt service is owed to international financial institutions at concessional terms. 6. The public debt projections do not incorporate contingent liabilities to the general government. - Key fiscal risks stem from power purchasing agreements and SOEs. - Under the EFF arrangement, the authorities strengthened assessment, monitoring, and transparency of those risks, including disclosure in the annual Fiscal Risk Statement (FRS). - A comprehensive sectorization exercise of SOEs in 2020 revealed 183 enterprises to be incorporated into the general government sector starting in 2021. - Authorities committed to comprehensive governance reform of SOEs classified as public corporations to help reduce fiscal risks. 7. Under the baseline, external debt is expected to decline steadily from about 98 percent of GDP in 2021 through the projection horizon. - External debt was stable at around 85 percent of GDP during 2016-19. - External debt increased by 22 percentage points of GDP in 2020, reaching about 110 percent of GDP, mainly driven by government borrowing from IFIs to combat the COVID-19 pandemic. - The external debt-to-GDP ratio sharply declined in 2021 due to lower external borrowing needs and a sharp USD-denominated GDP rebound. - Under the baseline, external debt is expected to continue to steadily decline to just below 60 percent of GDP in 2027, reflecting low external financing needs and efforts to reduce dependence on external borrowing and develop domestic capital markets. *Prepared by Andresa Lagerborg (FAD) and Yunhui Zhao (SPR).* ### 8. Stress tests suggest that the external debt-to-GDP ratio would be near or below its ### 8. Stress tests suggest that the external debt-to-GDP ratio would be near or below its ### Main findings from stress tests - The external debt-to-GDP ratio remains near or below its 2021 level in all standardized stress tests, considering: - individual shocks to the real interest rate, real GDP growth, and non-interest current account balance (all with permanent 1/2 standard deviation shocks); - a combined shock (with permanent 1/4 standard deviation shocks to these three variables). - A one-time real depreciation of 30 percent in 2023 would cause the external debt-to-GDP ratio to rise sharply, confirming vulnerabilities from a high share of FX-denominated debt; but this ratio would then decline steadily to 90 percent in 2027, below the 2021 level (98 percent). - The historical scenario (with historical averages calculated over the ten-year period) does not imply falling external debt, and is considered less relevant. ### Downside scenario (protracted regional conflict) - Assumed adverse shocks: - Commodity prices: 10 percent higher in 2023 compared to baseline; decline gradually to baseline in 2025. - Remittances: decline by 10 percent in 2023 compared to baseline. - Services exports/tourism: recovery delayed so tourism revenue reaches 2019 level in 2024 instead of 2023. - Lower exports: goods exports about 4 percent below baseline in 2022. - Capital outflows: nonresidents sell all holdings of local government bonds (around US$130 million) in 2022. - Macroeconomic effects: - The current account deficit is expected to deteriorate by about 1 percent of GDP in 2022 and 1.5 percent in 2023. - Reserves would fall to 62 percent of the ARA metric by 2024 (13 percentage points lower compared to the baseline). - Reserve coverage rises to only 66 percent of the ARA metric in 2025 under the downside scenario. - Drawing on the SBA would allow the authorities to reach 72 percent of the ARA metric by the end of the program in 2025. - Lari depreciation and lower growth worsen the outlook for external and public debt; depreciation would increase inflation in 2022 and beyond, somewhat mitigating the impact on nominal GDP. ### Authorities’ assumed/expected policy responses in the downside scenario - Monetary policy: - The NBG would maintain tight monetary policy to arrest inflation pressures. - The exchange rate would be allowed to act as a shock absorber, with reserves used to prevent disorderly adjustment. - Fiscal policy: - The government would increase targeted support to the vulnerable by 0.2 percent of GDP (doubling measures already done). - The scenario assumes the fiscal rule’s escape clause is triggered; additional temporary support of 0.3 percent of GDP for vulnerable households and 0.2 percent of GDP for affected businesses is assumed. - A small increase in current spending on goods and services is also assumed to address spending pressures from higher prices. - Financing options: - Drawing on the SBA is assumed in projections to bolster reserves. - To further boost reserves, authorities could consider an augmentation and additional financing from other IFIs and development partners, as done during the COVID-19 shock. ### Policy implications and vulnerabilities highlighted - High share of FX-denominated debt raises vulnerability to exchange rate shocks (a 30 percent depreciation causes a sharp immediate rise in external debt-to-GDP). - Reserve adequacy is fragile under adverse scenarios; without financing, reserves would bear the brunt of balance-of-payments adjustment. - Continued prudent fiscal policy, exchange rate flexibility, and progress on structural reforms are essential to safeguard external sustainability over the medium term. ### Key statistics and exact figures cited - 2021 external debt-to-GDP level: 98 percent. - External debt-to-GDP under the 30 percent real depreciation scenario: declines to 90 percent in 2027. - Current account deterioration in downside scenario: about 1 percent of GDP in 2022 and 1.5 percent of GDP in 2023. - Reserves (GIR) under downside scenario: - Fall to 62 percent of the ARA metric by 2024. - Rise to 66 percent of the ARA metric in 2025. - Drawing on the SBA would reach 72 percent of the ARA metric by end-2025. - Nonresidents’ sell-off assumption: around US$130 million of local government bonds sold in 2022. - Fiscal support measures in downside scenario: - Increase targeted support by 0.2 percent of GDP (doubling existing measures). - Additional temporary support assumed: 0.3 percent of GDP for vulnerable households and 0.2 percent of GDP for affected businesses. *Source: 1geoea2022002 - 8. Stress tests suggest that the external debt-to-GDP ratio would be near or below its* ### 140.5 percent of GDP. Despite being large, the (negative) NIIP narrowed by 17.0 percent of GDP ### 1geoea2022002 - 140.5 percent of GDP. Despite being large, the (negative) NIIP narrowed by 17.0 percent of GDP ### External position and NIIP sustainability - NIIP level: 140.5 percent of GDP. - Change: the (negative) NIIP narrowed by 17.0 percent of GDP relative to end-2020. - Main driver of narrowing: much higher USD-denominated GDP which more than offset a deterioration in the nominal NIIP including stronger gross FDI inflows. - EBA-lite (external sustainability) assessment under the current baseline: - The NIIP does not deteriorate in net present value terms; the NIIP is sustainable based on this definition. - No exchange rate adjustment is needed to maintain the same level of NIIP over the medium term. - Caveats: - The assessment is relatively narrow. - Potential vulnerabilities associated with the current level of the NIIP or its composition require further analysis. - Bottom-line assessment must also consider the CA and the REER Index approaches. ### Composition of external liabilities and vulnerability mitigation - At end-2021, composition of gross liabilities: - FDI: about 51.3 percent of gross liabilities. - Loans: about 33.9 percent of gross liabilities. - Government exposure: - Government loans account for about 56.8 percent of the external loan stock as of 2021Q4. - Much of the recent increase in external debt reflects concessional loans to the government from IFIs. - Private sector external debt: remained almost unchanged in nominal terms at end-2021 relative to end-2020. - Implication: composition (large FDI share, large share of official/concessional government loans) limits vulnerability to shocks. ### Current Account (CA), tourism, remittances, and REER analysis - 2021 CA deficit: 9.8 percent of GDP (preliminary), which is 2.6 percentage points lower than in 2020. - Drivers of 2021 CA improvement: - Remittances: increase of 38 percent y/y. - Tourism revenues: increase of 130 percent y/y, but still at only 38 percent of the 2019 level. - 2022 outlook and war in Ukraine impact: - Expected decrease in net remittances by 13 percent y/y in 2022. - Tourism revenue: projected decline from 66 percent of the 2019 level (projected before the war) to 62 percent. - CA deficit in 2022 expected to widen to 10.9 percent of GDP. - Medium-term projections (baseline, assuming no significant COVID-19 deterioration and timely reforms): - CA deficit projected to decline to 7.5 percent in 2023. - CA deficit projected to gradually decline to 5.6 percent of GDP in 2027 (close to historically low 5.5 percent in 2019). - Tourism revenue expected to fully recover to the 2019 level by 2023. - Net remittances in 2023 expected to exceed the 2021 level. - Exchange rate history and movements: - From February 2020 to April 2021: lari depreciated by 11.2 percent (nominal) and 9.4 percent (real effective). - April 2021 to January 2022: NEER appreciated by 22.4 percent; REER appreciated by 18.1 percent. - War in Ukraine (late February 2022) halted appreciation and caused a sharp temporary weakening against the USD; as of end-March 2022, lari nearly recovered to pre-war level against the USD and remained broadly stable in nominal effective terms. - EBA-lite CA and REER results for 2021: - Cyclically adjusted CA balance is 0.6 percent higher than the CA norm in 2021 (compared with a negative gap of 1.0 percent of GDP in 2020). - A positive CA gap of 0.6 percent of GDP corresponds to REER undervaluation of 1.5 percent. - Policy gaps account for 0.3 percent of GDP out of total CA gap of 0.6 percent of GDP. - REER Index approach suggests a CA gap of 1.2 percent of GDP and corresponding REER undervaluation of 3.3 percent. - Overall assessment from these approaches: Georgia’s external position in 2021 is broadly in line with fundamentals and desirable policies, but results should be interpreted with greater caution given caveats and pandemic uncertainty. - Authorities advised to sustain reform agenda to enhance external competitiveness and raise net private savings. ### Capital and financial flows - Financial account surplus in 2021: 11.3 percent of GDP. - This was 1.3 percentage points lower than in 2020 but 5.2 percentage points higher than in 2019. - Net loan inflows and net portfolio inflows were lower in 2021 than in 2020, partly offset by the SDR allocation (1.5 percent of GDP). - Medium-term projections for financial flows: - Financial account surplus projected to be around 8 percent of GDP over the medium term. - FDI (net) projected to gradually increase and stabilize around 6 percent of GDP. - Net external loan inflows (public and private) expected to gradually decrease from their peak in 2021 as COVID-related external borrowing falls. - Over the medium term, the bulk of Georgian external debt expected to be to IFIs and mostly on concessional terms; external debt maturity expected to remain largely medium- and long-term. ### Reserves - End-2021 reserves: - GIR: reached 107.7 percent of the ARA metric at end-2021. - NIR: $1,725 million (at program exchange rates, including the SDR allocation) by end-2021. - GIR: $4,272 million (at market exchange rates) by end-2021. - 2022 and medium-term projections (baseline): - GIR coverage projected to fall to 79.4 percent of the ARA metric in the baseline scenario (2022). - GIR projected to be 74.7 percent of the ARA metric by end-2024. - GIR projected to gradually increase to 98.0 percent by end-2027. - Drivers of reserve decline in 2022: - Sharp decrease in COVID-related donor financing. - Lower remittances. - Slower recovery in tourism due to the war. ### Overall assessment and risks - 2021 external position assessment: broadly in line with fundamentals and desirable policies. - External vulnerabilities: - Assessed to decrease relative to 2020 but remain relatively high. - Key risks: large decline in remittances caused by the war, protracted recovery in tourism, gradually narrowing CA deficit, and large negative NIIP. - Policy implication: strong and prudent macroeconomic policies are needed to maintain and strengthen external sustainability over the medium term. ### Policy intent and program (from Letter of Intent and MEFP) - Economic outlook and targets: - Real GDP growth in 2021: 10.4 percent. - Growth expected to decline to around 3 percent in 2022 (down from close to 6 percent previously anticipated). - Conditional rebound in 2023 and easing to medium-term growth rate of around 5 percent by 2024. - Inflation: - Inflation increased from 2.4 percent at end-2020 to 13.9 percent at end-2021; averaged 9.6 percent for 2021. - One-off factors estimated to have contributed roughly 9 percentage points to headline inflation in December. - Average inflation expected to rise to 10.9 percent in 2022; projected to begin converging toward target around end-2023. - NBG increased the policy rate by a cumulative 300 basis points since March 2021 and stands ready to increase further if needed. - Fiscal policy and reserves management: - Commitment to consolidate public finances in compliance with fiscal rule and rebuild fiscal buffers. - GIR increased to 108 percent of the IMF’s ARA metric at end-2021; reserves projected to drop to close to 80 percent of the ARA metric by end-2022, then accumulate over the medium term as FDI strengthens and CA narrows. - Program request: - Request for a 36-month Stand-By arrangement (SBA) with a cumulative amount of SDR 210.4 million (100 percent of quota), intended to be treated as precautionary. - Structural and reforms priorities: - Strengthen public finance management and governance of state-owned enterprises. - Monetary policy focused on bringing inflation back to target and maintaining exchange rate flexibility. - Implement recommendations from the Financial Sector Assessment Program to strengthen financial system resilience and pursue de-dollarization. - Continue structural reforms, including liberalizing energy markets and increasing education quality. *Source: IMF staff report and attachments (text excerpts provided).* ### 2.1 percent of GDP in healthcare costs and 1.3 percent of GDP in household and business ### 2.1 percent of GDP in healthcare costs and 1.3 percent of GDP in household and business ### Fiscal targets, rules, and deficit trajectory - Fiscal rule: bring the deficit below 3 percent of GDP by 2023. - Augmented general government deficit path: - 4.0 percent of GDP in 2022 - 2.8 percent of GDP in 2023 - 2.3 percent of GDP in 2024 - The general government perimeter will be expanded to include state-owned enterprises classified as general government units. - Meeting 2023–2024 deficit targets will require additional measures to be adopted in consultation with IMF staff. ### 2022 budget envelope and fiscal stance - Adopted total spending excluding interest payments: GEL 19,655 million. - Expected revenues: around GEL 17.4 billion. - Augmented deficit consistent with the spending envelope: 4.0 percent of GDP. - Commitment: save any revenue windfalls to achieve additional deficit reduction, except small amounts for targeted support for the vulnerable. - Stated readiness to adopt additional measures, including expenditure reductions, to meet the 4.0 percent of GDP augmented deficit target. ### Targeted support and social spending adjustments - Targeted measures to shield vulnerable consumers from higher global commodity prices: - Increase ongoing targeted support to qualifying families with children and provide one-off fertilizer vouchers to qualifying subsistence farmers. - Combined cost of the above measures: about 0.2 percent of GDP in 2022. - Public sector salary adjustment: - 10 percent increase in the basic public sector salary (from GEL 1,000 to 1,100) in January 2022. - Work underway to develop an indexation rule for salary increases. ### Performance criteria and indicative targets (selected) - End-June 2022 augmented cash deficit of the general government (performance criterion): GEL 1,370 million. - Indicative target: primary current spending to be kept below GEL 7,030 million. ### Debt objectives and public debt management - Commitment to reduce general government debt to 45 percent of GDP in the medium term. - Debt developments: - Sharp increase in general government debt in 2020 pushed debt-to-GDP ratio to the 60 percent ceiling in the fiscal rule. - Debt-to-GDP ratio reduced to 50 percent as of 2021. - Projected to decline sustainably below 50 percent of GDP in 2024, supported by fiscal adjustment and economic growth. - Public debt management strategy 2022–25 (draft published November 2021): - Increase share of local currency-denominated debt from 20 percent in 2021 to 28 percent in 2025. - 2022 domestic debt issuance calendar published in December 2021, including schedule for issuance of benchmark bonds. ### Mobilizing revenues and expenditure savings (medium term) - Rationale: create fiscal space for higher education, health, and infrastructure spending, including energy independence. - Expenditure dynamics: - Primary current spending in 2022 expected to be 0.5 percent of GDP higher than in 2019. - Major drivers: - Increased pension bill: 0.6 percent of GDP (due to introduction of the pension indexation rule and Pillar II). - COVID-19 healthcare spending: 0.7 percent of GDP. - Offsetting cuts introduced: goods and services and the wage bill cuts of 0.3 percent of GDP each relative to pre-pandemic levels. - Potential further savings: improve efficiency of public healthcare provision, better targeting of social programs in municipalities, strengthen SOE performance through comprehensive SOE reform, and delay infrastructure projects if needed. - Revenue-enhancing measures: - Aim to increase tax revenues-to-GDP to meet medium-term deficit targets while preserving priority spending. - Expected revenue sources: efficiency improvements in tax administration, streamlining tax expenditures, and modernizing property taxes. - Yield estimates to be refined with IMF technical assistance. ### Managing fiscal risks and public investment - Power sector and PPAs: - Limit risks from power purchase agreements (PPAs) and expand power generation capacity in a fiscally sustainable manner. - Government Decree 403 amended to promote hydropower and other renewable projects via feed-in premiums. - Plan to develop a complementary support scheme for renewable power generation that limits fiscal risks (consult IMF staff; end-July 2022 SB). - Until the new scheme is in place, refrain from initiating new PPAs or other government support for renewable power projects. - Seek to terminate previously issued but non-operational PPAs that cannot be migrated to the new framework. - No government-initiated energy generation investments without independent technical evaluation supporting commercial viability. - Public Investment Management (PIM) strengthening: - Mandate in 2023 budget decree: subject all new public investment projects over GEL 5 million to the existing PIM framework. - No new investment projects over GEL 20 million to be included in the 2023 state budget law unless selected according to PIM guidelines (end-December 2022 SB). - Submit amendment to the budget code to make all investments above a threshold (to be identified with TA) subject to the PIM framework (end-September 2022 SB). - Develop a process for external independent review of large investments and undertake an updated PIMA with IMF TA (end-March 2023 SB). - Debt payment discipline: - Will not accumulate general government external debt payment arrears outside those under negotiation. - Will not accumulate net domestic expenditure arrears of the general government. - Will not issue new public guarantees or comfort letters. ### State-owned enterprise (SOE) reform and quasi-fiscal activities - Comprehensive reform strategy for SOEs (public corporations) formulated and published, supported by IMF TA. - Key elements and commitments: - Apply the strategy initially to 24 public corporations that are public interest entities (PIEs) plus selected other SOEs; later apply to remaining 28 smaller public corporations. - Finalize and adopt the public corporation reform strategy in agreement with IMF staff and in line with OECD principles (end-July 2022 SB). - Centralize ownership of public corporations in the Ministry of Finance (MOF) in agreement with IMF staff, with a possible exception for electricity generation or transmission to comply with EU unbundling directive. - MOF to have strengthened financial oversight and decision-making authority; MOF approval required for all key financial decisions and statements of corporate intent. - Issue a government decree (prior action) requiring MOF approval for key financial governance decisions for major public corporations. - Issue a timebound plan to implement SOE reform strategy and pilot it in three major SOEs starting in 2022 (end-August 2022 SB). - Determine ultimate ownership of Georgian State Electrosystem (GSE) by end-July 2022 (SB) and ensure MOF responsibility for financial governance. - Submit a draft framework law for public corporations to Parliament in accordance with the strategy (end-December 2022 SB). - Continue identification, analysis, and disclosure of quasi-fiscal activities (QFAs); introduce transparent mechanism to identify and compensate public corporations for public service obligations starting in reporting year 2023. - Ensure SOEs do not enjoy competitive advantages relative to private companies and do not engage in new quasi-fiscal operations unless explicitly mandated. - Consider subjecting SOEs classified as general government entities to regulations similar to Legal Entities of Public Law (LEPLs). - Implement efficiency-enhancing reforms in Georgian Amelioration in 2022 with ADB TA, including establishing an independent supervisory board and adopting corporate governance principles. - Partnership Fund operations constrained: - Will not undertake any new investments or borrowing (continuous performance criterion). - Will not run a deficit (performance criterion). - Must comply with deadlines to submit financial statements to the MOF. ### Support for SMEs and private-sector equity participation (scope and safeguards) - Explore scope for minority government participation in private equity or venture capital funds focused on SMEs, in consultation with IMF staff and alongside international financial institution co-investors. - Conditions for any government equity participation: - Based on OECD corporate governance principles. - Government to hold minority shareholding and passive participation (no role in selecting investment recipients). - Legislative amendments to ensure minority/passive role and to require an exit strategy and specific time horizon. - Restrictions: - Apart from possible minority participation in a private fund as described, the government will refrain from taking new equity stakes in private Georgian businesses or establishing institutions to take such stakes. - The Partnership Fund will not be involved in government participation in private equity or venture capital investment funds. *Source: IMF staff and Georgian government program text (excerpts).* ### 12. We are strengthening our revenue administration to improve taxpayer services, ### 12. We are strengthening our revenue administration to improve taxpayer services, ### Revenue administration reform and commitments - Completed a four-year tax administration reform program supported by the Revenue Mobilization Trust Fund in April 2021. - A Tax Administration Diagnostic Assessment led by the IMF in 2021 concluded that significant improvements in Georgia’s revenue administration were made over 2016-2020. - Committed to further improvements including better taxpayer services, management and governance arrangements, and strengthened compliance. ### Compliance and audit yields - Plan to enhance the use of risk-based audits to identify non-compliant cases likely to produce higher yields. - Training of Georgia Revenue Service (GRS) Audit Department staff on the new audit case management system (CMS) began when the system was piloted in February 2021. - Addressing technical issues that caused significant delays in making the CMS fully operational; began to implement the CMS in January 2022. - Expected CMS benefits: enhanced compliance risk management, audit timeliness, and productivity. ### Compliance improvement plan (CIP) and large taxpayer management - Will implement a compliance improvement plan (CIP) to address high-risk sectors from a holistic perspective. - Adopted a continuing process for annual tax compliance planning focusing on the largest compliance risks, based on IMF advice. - Will enhance large taxpayer management, including through utilizing key performance indicators (KPIs). ### Taxpayer register and withholding enforcement - Creating a register of employees for tax administration purposes. - The new taxpayer register provides a strong basis for improving filing compliance and arrears management. - Will take further steps to enforce compliance including auditing employer withholding taxes. ### Automatic access to third-party information - Expanded information-sharing with government agencies and the Financial Monitoring Service (FMS) for monitoring high-risk suspicious transactions. - Will expand the system further for monitoring all suspicious transactions, not only those considered to be high-risk. - Automatic reporting from financial institutions will be considered in the context of the international reporting requirements under the automatic exchange of financial information for tax purposes, which Georgia has committed to implementing by December 2024, and scope for earlier action will be explored. - Recognize that limiting tax administration’s access to data from financial institutions hinders achievement of robust tax compliance risk management. ### VAT refunds and liquidity support - Will further step-up VAT refunds to help provide liquidity to the private sector and reduce the stock of unrefunded VAT credits. - Reduced outstanding stock of VAT credits that are within the limitation period for audit from GEL1.4 billion at end-2017 to GEL1.0 billion at end-December 2021. - Commit to reducing the audited stock of VAT declarations cleared for payments (so-called “green credits”) to no more than GEL 50 million (end-December 2022 SB). - Implemented an automatic refund system of VAT credits in November 2020 to accelerate new VAT refunds. - Under the new system, commit to automatically process (refund, offset, or permanently disallow) at least 90 percent of VAT credit claims (measured as both the number and value of declarations) within 30 calendar days. - Will produce statistics on a monthly basis that monitor compliance with this measure (end-July 2022 (for June 2022) and end-January 2023 SBs (for July-December 2022)). ### Mobilizing revenue within the existing tax framework - There is significant potential to mobilize revenues by expanding the tax base. Key actions: - Tax expenditures - Assessed VAT and income tax expenditures with TA from the IMF and USAID respectively, which quantified the fiscal cost of tax expenditures at close to 6 percent of GDP. - Disclosed selected VAT expenditures as part of the 2021 budget documentation. - Will submit to Parliament budget code amendments to authorize the requirement for tax expenditure reporting including the nature of tax expenditures and their costs, and establish a schedule for annual tax expenditure reporting (end-September 2022 SB). - Will publish a first tax expenditure report, including the nature of existing tax expenditures and their costs (end-December 2022 SB). - Will complete a tax expenditure evaluation for VAT and income taxes including cost-benefit analysis for key tax expenditure items (end-June 2023 SB). - Note: Since the government is a large consumer in sectors with tax expenditures, the net impact of streamlining tax expenditures (and substituting them with more targeted government programs) is expected to be significantly lower. - Property taxes - Will modernize Georgia’s property tax system by introducing a more centralized and comprehensive valuation process, for example based on satellite technology, to make it simpler and fairer (declarations currently rely on self-assessment). - Will consider changing the property tax so that only properties with a value above a certain threshold are taxed to protect the poor. - Current exemption: households with income below GEL 40,000 are exempt, which protects foreigners who receive little income in Georgia. - Medium-term revenue strategy (MTRS) - Will develop an MTRS with the help of IMF TA (end-September 2023 SB) to identify options for revenue mobilization while promoting tax efficiency and progressivity. ### Fiscal transparency, budgeting, and accounting - Making general government (GG) coverage consistent with classification of SOEs into general government units (GG SOEs) and public corporations; GG SOEs should be treated the same as any general government unit. - In 2022, will incorporate data from GG SOEs in fiscal reports for 2021 actual data. - Will create automated mechanisms to have timely access to information in GFS reporting format starting in 2023, including by possibly transferring bank accounts of major SOEs to the Treasury account. - Compiled SOE data for reporting year 2019 according to GFSM 2014. - Any newly identified SOEs will be classified as general government entities until sufficient evidence exists to classify them as part of the public corporation sector. - Improving quality of fiscal reports and complying with international accounting standards: - Consolidated the central government sector financial reporting based on International Public Sector Accounting Standards (IPSAS) for the first time in 2021. - Will publish the 2022 consolidated financial statements for the central government based on IPSAS and consistent with FAD advice (end-June 2023 SB). ### Monetary policy and exchange rate framework (overview linked to fiscal context) - Committed to inflation targeting (IT) framework to maintain price stability; monetary policy decisions will continue to depend on the inflation outlook. - Recognize risk that transient inflation developments become entrenched in inflation expectations or that another external shock could trigger another round of lari depreciation and inflationary pressure; stand ready to tighten rates further to avoid this risk. - Maintain a flexible exchange rate regime to protect the economy against external shocks while preventing disorderly market conditions. - Floating exchange rate regime used as a shock absorber; Georgia remains a highly dollarized economy. - Commitment to exchange rate flexibility evidenced by consistently meeting targets on net international reserves (NIR) under the previous EFF arrangement with comfortable margins; reserves will be used only to avoid disorderly market conditions. - In aftermath of COVID-19 and response to the new geopolitical crisis, accumulation of reserves largely suspended and focus shifted to providing foreign exchange (FX) liquidity. - FX sales primarily ad-hoc interventions to support FX supply complemented by smaller-sized, rule-based FX sales triggered by exchange rate volatility and need for FX market liquidity. - To avoid disorderly market conditions during the pandemic, began selling foreign exchange to public corporation SOEs through the Treasury when their purchases could exceed daily FX market transaction volumes and cause exchange rate fluctuations. - Assuming pandemic and geopolitical volatility recedes, the Treasury will phase out such sales in 2023 to balance FX market deepening with stability needs. *Source: 1geoea2022002 — IMF (Georgia).* ### 18. Over the medium term, we remain committed to maintaining adequate reserves, ### 18. Over the medium term, we remain committed to maintaining adequate reserves, ### Reserve position, projections, and communications - Current balance of payments projections imply the ratio of gross international reserves to the IMF reserve adequacy metric (ARA) is expected to decrease by about 5 percentage points between 2022 and 2024, reflecting the negative impact of the back-to-back shocks of the war in Ukraine and the pandemic, a difficult external environment, and reduced external borrowing by the government. - Over the medium term, reserve coverage is expected to improve gradually and reach about 98 percent of the ARA metric by 2027. - Policy stance: - Committed to rebuilding external buffers faster, consistent with exchange rate flexibility, and if market conditions allow. - Intervention strategy will be guided by reserve adequacy and price stability goals, with reserve accumulation objectives suspended at times when markets become disorderly. - Communication improvements: - Update the NBG communication strategy including specifying objectives for and introducing regular impact assessments of NBG communications (end-December 2022 SB). - Strengthen communications about FX reserves management by announcing the goals and intermediate objectives of the FX intervention strategy. ### D. Financial Sector Policy — system stability and crisis response - Crisis response and provisioning: - Prompt actions at the onset of COVID-19 stabilized the financial system; committed to maintaining adequate capital and liquidity buffers at banks. - In 2020 completed a targeted loan quality assessment and stress tests, resulting in additional ex ante general and specific provisions; banks were required to preserve capital to strengthen loss absorption capacity. - Committed to similar measures if warranted by conditions, including in light of rapid credit growth and the war in Ukraine. - Continue to monitor NPLs and restructured loans; ensure banks promptly account for expected losses through provisioning and write-downs. - VTB Bank Georgia restructuring: - In response to sanctions against VTB and subsidiaries, NBG facilitated transactions: Basis Bank purchased retail loan and deposit portfolio; Liberty Bank bought part of corporate (SME) loans and deposits, without impact on banking system stability. ### Macroprudential calibration and consumer protection measures - Mortgage and FX exposure measures: - Reduced maximum maturity of FX mortgages from 15 years to 10 years. - Recalibrated the currency-induced credit risk buffer (CICR) so that it varies between 40 and 100 percent based on a bank’s loan portfolio dollarization; banks will be given one year to adjust to the new CICR buffer. - Responsible lending recalibration: - Increased the income threshold below which borrowers are subject to a 25 percent payment-to-income ratio from GEL 1,000 to GEL 1,500. - Required banks to subject variable interest rate loans to an additional 3 percentage point interest rate shock in assessing the borrower’s capacity to repay. - Expected outcome: dampen over-indebtedness risks for households over time by moderating retail credit growth and further incentivize de-dollarization. - Consumer protection and debt collection: - Approved a Code of Ethics for debt collection by financial institutions based on best international practices. - Introduced amendments to the Rule on Consumer Protection for Financial Organizations to increase transparency and improve consumer protection, based on European Directives and market challenges. ### Supervisory governance, recovery, resolution, and corrective frameworks - Supervisory processes and transparency: - Plan to establish specific procedures across the entire supervisory cycle, including supervision planning, decision-making, communications with banks, and follow-up on corrective actions. - Following FSAP recommendations, by end-June 2022 (SB) will: (i) develop an internal procedure for the General Risk Assessment Program (GRAPE) specifying the entire assessment process (including communication with banks’ supervisory boards), structural units involved, terms and decision-making processes; and (ii) update the GRAPE guidelines to enhance transparency and compliance with advanced international practices. - Will routinely contact external auditors to discuss findings and risk analysis. - Bank recovery and resolution: - Banks submitted first recovery plans; NBG prepared first resolution plans. - Intend to develop internal procedures to encourage competitive bidding for the sale of business resolution tool and support execution of the bail-in tool. - MOF in cooperation with NBG will develop a playbook to make the bridge bank tool operational (end-March 2023 SB). The playbook will address establishment, governance, capitalization and financing, operation and eventual sale of the bridge bank. - Will amend the Banking Law to update and simplify the creditor hierarchy by adopting a simplified tiered structure consistent with deposit insurance coverage. - Prompt corrective action: - Will amend the Recovery Planning Rule to require thresholds for triggering management escalation be set appropriately relative to minimum prudential regulatory requirements. - Will develop policy guidance (end-December 2022, SB) to ensure timely action, including initiation of license revocation or alternative failure resolution action, in response to financial deterioration. - Will continuously monitor and evaluate banks’ recovery plans and compliance with indicators. - Large exposures and monitoring: - Fully implement large exposure limits by June 2022. - Tightened the large exposure limit to 25 percent of Tier 1 capital for both related and non-related parties (interconnected borrowers), with definition of connected parties and supervisory discretion in line with international standards. - Temporary postponement of implementation will expire by June 2022; from January 2022 banks should refrain from creating any new exposures that breach this limit. - Will regularly collect additional information from banks about financial situation of large borrowers and monitor portfolio concentration risk. - Shadow lending and legislative responses: - Continue to monitor shadow lending practices (sale and leaseback), identify and assess impacts, and initiate legislation as needed to close potential leakages from macroprudential tools to entities outside NBG’s regulatory perimeter. ### Data, reporting standards, and payment systems - Data collection and systemic risk assessment: - Strengthen data collection by signing memorandums of understanding between NBG, the Georgia Revenue Service, and the Public Registry to establish formal procedures for data exchanges. - Data collection and publication to include granular real estate price and transactions data (e.g., by city/region, property types including commercial real estate coverage, number of transactions, rental rates, ownership of secondary homes, land prices, and building permits issued). - Credit registry to include detailed data on loans, interest rates, and borrower information such as income. - Develop additional data fields for assessment of new types of risks such as climate. - Publish an assessment of climate-related financial sector risks (end-December 2022 SB). - IFRS adoption: - Since 2021, commercial banks allowed to voluntarily start preparing financial statements according to IFRS. - Guidelines specified to standardize reporting for expected losses and calibrated capital requirements so they remain unchanged as a result of the transition to IFRS. - By 2022, banks required to submit statements under both current standards and IFRS. - Any reduction in provisioning due to transition to IFRS9 will be reflected in additional capital requirements so the IFRS transition has no net impact on the overall capital position of the banking system. - Payment systems and competition: - Law of Georgia on “Payment Systems and Payment Services” substantially compliant with PSD2; NBG will propose further amendments to increase security of cashless payments, competition among providers, and consumer protection. - To increase competition, law will enable regulated third-party providers to acquire access to users’ data at commercial banks subject to users’ consent; NBG will foster development of common industry-specific technical standards for open banking. ### Financial inclusion, capital markets, and AML/CFT - Micro-banks and financial inclusion: - Legislation prepared to establish a new class of regulated banks — “micro-banks” — to fill gap between commercial banks and microfinance organizations, focused on lending for entrepreneurial and agricultural activities. - NBG will define business model and size of micro-bank and set a minimum amount of regulatory capital of 10 million GEL, a maximum loan limit of 1 million GEL, capital adequacy, credit and liquidity ratios, and other prudential limits and standards. - A few microfinance organizations expected to become micro-banks upon approval of legislation to increase competitiveness of lending for SMEs and improve financial inclusion, especially in regions. - Capital market development: - After Parliament’s adoption of legislation on investment funds and amendments to securities’ market law, NBG updated capital market regulatory framework, notably concerning the Pension Agency. - Draft law on dematerialized securities holdings submitted to Parliament and expected to be adopted by end-December 2022; will strengthen foundation for securities market, allow centralized issuance of public securities with a central securities depository and improve investor protection. - NBG became a regular member and MoU signatory of the International Organization of Securities Commissions. - Covered bond legislation submitted to Parliament; plan to initiate securitization legislation in 2022 to provide liquidity management and improved long-term funding mechanisms. - Introduced a corporate governance code for listed entities. - AML/CFT strengthening: - Designing regulations on virtual asset providers in line with IMF TA recommendations. - Strengthen regulation and supervision for the gaming sector, virtual asset service providers, and real estate agents in line with FATF recommendations and MONEYVAL fifth round mutual evaluation report recommendations. - Consider issuing guidelines to strengthen due diligence measures on cash transactions by financial institutions and/or setting maximum cash thresholds for certain transactions for: (i) financial institutions used by trading companies to purchase goods in foreign currency; and (ii) use of cash in real estate transactions. - Strengthen analysis of suspicious transactions reported by banks by increasing supervisory attention and issuing additional guidelines. - Mandated and will monitor that the financial sector complies with international sanctions, including those imposed as a result of the war in Ukraine. ### Governance, accountability, and institutional reforms - Review of decision-making and oversight: - Review framework for decision-making, oversight, transparency, internal controls, and accountability for key monetary and financial sector policies, including assessing collegial versus presidential decision-making practices for monetary and financial sector policies relative to the NBG’s responsibilities. - Will ask for Fund’s TA in this area, benchmarked against international best practices, and consult with Fund staff before suggesting possible changes to the Organic Law on the NBG, if needed. - Clarify roles and responsibilities of the NBG board regarding financial supervision activities, in line with FSAP recommendations. ### E. Structural Reforms — labor, education, inclusion, and business environment - Labor market and skills: - Decreasing skills mismatch is key to reducing high unemployment. - Will conduct a labor market survey to monitor labor demand and skills needs (end-June 2023 SB). - Strengthen vocational education and training (VET) programs, with focus on engineering, manufacturing and construction, business administration and law, and information technology, communications and services. - Vocational Skills Agency established in June 2021 by Ministry of Education and Science and Georgian Chamber of Commerce and Industry to design VET programs aligned with labor market needs and offer on-site training. - Law amended (September 2020, effective September 2021) to allow students in vocational education to postpone compulsory military service to facilitate VET participation. - Education quality and cost-effectiveness: - Additional funding for education over the medium term conditional on concrete steps to improve quality of teachers; prioritize funding across subsystems based on assessment of marginal benefits. - Plan to develop professional orientation system, improve teacher qualification, and develop transition program from general education to VET, including for students with disabilities. - Social protection and gender: - Conduct comprehensive review of social protection measures and consider improvements, including policies to reduce the gender gap in the labor market. - Provided training to government staff to promote gender impact assessment in policymaking. - Member of Equal Pay International Coalition; steps taken include improved maternity benefits and daycare services. - Developed guidelines for labor inspectors to evaluate job-specific remuneration and intend to strengthen labor inspection services to monitor equal pay. - Plan to improve Targeted Social Assistance programs by digitalizing the service, expected to reduce initial disbursement time from roughly 12 to 6 weeks. - Business environment and FDI facilitation: - Advance core infrastructure investments, including major highway corridors to better integrate regions, facilitate exports, and support Georgia as a transport and logistics hub connecting Europe with Asia. - Plan updated feasibility study (possible EU support) for ferry and container services between ports of Georgia, Bulgaria, Romania, and Ukraine. - Improve IT infrastructure and human capital in IT, with priority for digitalization of SMEs. - Corporations to be gradually required to publish audited financial statements based on IFRS. - Operationalizing recently approved insolvency law to improve efficiency of insolvency procedures, with training and licensing of insolvency practitioners gaining pace. *Source: 1geoea2022002 - 18. Over the medium term, we remain committed to maintaining adequate reserves,* ### 39. We are committed to deepening trade relations, which would support economic ### 1geoea2022002 - 39. We are committed to deepening trade relations, which would support economic ### Trade liberalization and labor migration - Continue to liberalize trade and have ongoing discussions with several countries (Republic of Korea, Israel, India, the UAE and other GCC countries) to launch negotiations on free trade agreements (FTAs). - Discussions are ongoing with Turkey to expand the existing FTA that covers trade in goods to also include trade in services. - Committed to pursuing an FTA with the United States. - Working towards improving labor migration management, strengthening legal labor immigration, and developing a bilateral contractual basis for emigration and temporary employment abroad (circular migration). ### Program monitoring and safeguards - The program will be monitored through quantitative performance criteria, indicative targets, an inflation consultation clause, and structural benchmarks. - The inflation consultation clause targets and bands are shown in Table 1. - Quantitative performance criteria and indicative targets for end-June and end-December 2022 are listed in Table 2. - A list of structural benchmarks under the program is set out in Table 3. - The Technical Memorandum of Understanding (TMU) describes definitions of quantitative PCs, the inflation consultation clause, and data provision requirements. - The NBG continues to maintain a strong safeguard framework and internal control environment. - An updated IMF Safeguards Assessment will be completed before the first review of the program. - Independent external audit firms are engaged to conduct audits of the NBG in accordance with international standards. ### Inflation consultation targets and bands for 2022 (Table 1) - Central point: End-June 11.8 percent; End-December 8.1 percent - Inner band, upper limit/lower limit: End-June 13.8 / 9.8; End-December 10.1 / 6.1 - Outer band, upper limit/lower limit: End-June 14.8 / 8.8; End-December 11.1 / 5.1 - Source: IMF staff estimates ### Quantitative performance criteria and indicative targets (Table 2, cumulative from beginning of calendar year, millions of GEL unless otherwise indicated) Performance Criteria (End-June / End-December) - Ceiling on the augmented cash deficit of the general government (program definition): 1,370 / 2,740 - Ceiling on general government net budget lending: 30 / 75 - Floor on NIR of NBG 1/ (end-period stock, million of U.S. dollars): 1,204 / 840 - Ceiling on the accumulation of external debt arrears of the general government (continuous criterion) (million of U.S. dollars): 0 / 0 - Ceiling on new public guarantees (continuous criterion): 0 / 0 - Ceiling on the cash deficit of the Partnership Fund (million of U.S. dollars): 0 / 0 - Ceiling on new investments by the Partnership Fund (continuous criterion): 0 / 0 - Ceiling on the new net borrowing of the Partnership Fund (million of U.S. dollars, cumulative from the beginning of the program, continuous criterion): 0 / 0 Indicative Targets (End-June / End-December) - Ceiling on the accumulation of net domestic expenditure arrears of the general government: 0 / 0 - Ceiling on primary current expenditures of the general government: 7,030 / 14,210 - /1 The NIR target is proposed using a constant USD/EUR exchange rate on March 15, 2022 (1.09875) ### Prior actions and structural benchmarks (Table 3) Fiscal - Prior Action: Issue a government decree, in consultation with the IMF staff, to require Ministry of Finance approval for key financial governance decisions and statements of corporate intent for major public corporations Fiscal and Tax Policy - End-September 2022: Submit budget code amendments to authorize the requirement for tax expenditure reporting including the nature of tax expenditures and their costs and establish a schedule for annual tax expenditure reporting - End-December 2022: Publish first tax expenditure report including the nature of existing tax expenditures and their costs - End-June 2023: Complete a tax expenditure evaluation for VAT and income taxes including cost-benefit analysis for key tax expenditure items - End-September 2023: Develop a medium-term revenue strategy supported by IMF TA Public Financial Management - End-July 2022: Develop a complementary support scheme for renewable power generation that limits fiscal risks in consultation with the IMF staff - End-September 2022: Submit to Parliament an amendment to the budget code to make all investments above a threshold (to be identified with IMF TA) subject to the PIM framework - End-December 2022: Require all investment project over GEL 20 million in the 2023 state budget law to be selected according to the PIM guidelines - End-March 2023: Undertake an updated Public Investment Management Assessment (supported by IMF TA) Fiscal Risks - End-July 2022: Finalize and adopt public corporation reform strategy in consultation with the IMF staff and in line with OECD principles, including by ensuring a clear separation between state shareholding and policymaking functions - End-July 2022: Determine the ultimate ownership of Georgian State Electrosystem - End-August 2022: Issue a timebound plan for the implementation of the SOE reform strategy, including to pilot it in three major SOEs starting in 2022, to be selected in consultation with the IMF staff - End-December 2022: Submit to Parliament a draft framework law for public corporations developed in consultation with IMF staff that is consistent with the strategy approved by the Government of Geogia - End-December 2022: Include in the 2022 Fiscal Risk Statement a quantification of fiscal risks from climate change and legal claims, and a long-term sustainability assessment for health and aging-related spending - End-June 2023: Publish the consolidated central government financial statements for 2022 based on IPSAS standard and consistent with IMF staff advice Tax Administration - End-July 2022: Automatically process (refund, offset, or permanently disallow) at least 90 percent of VAT credit claims (measured as both the number and value of declarations) within 30 calendar days and produce statistics on a monthly basis to monitor compliance - End-December 2022: Reduce the audited stock of VAT declarations cleared for payments to no more than GEL 50 million - End-January 2023: Automatically process (refund or offset) at least 90 percent of VAT credit claims (measured as both the number and value of declarations) within 30 calendar days and produce statistics on a monthly basis (for July through December 2022) to monitor compliance Monetary Policy and Financial Sector - End-December 2022: Update NBG communication strategy including by specifying objectives and introducing regular impact assessments of NBG communications - End-December 2022: Develop policy guidance on corrective action framework for banks (see MEFP ¶24) - End-June 2022: Enhance governance of key internal processes for supervisory operations and decisions in line with FSAP recommendations (see MEFP ¶22) - End-March 2023: Develop a playbook to make the bridge bank tool operational. - End-December 2022: Publish an assessment of climate-related financial sector risks Structural Reform - End-June 2023: Conduct a labor market survey to monitor labor demand and skills needs - Prior Action: (listed under Structural Benchmarks) ### Technical Memorandum of Understanding (TMU) — key definitions and reporting - Program monitoring: All foreign currency denominated assets will be valued in lari at program exchange rates specified in the TMU. - Cross-rates as of March 15, 2022 will be used for conversions for program purposes. - Table: Program exchange rates (US$ per Currency) - SDR Special Drawing Rights: 1.37933 - GEL Georgian lari: 0.30939 (Equivalently, 1 US$ = 3.23220 GEL) - EUR Euro: 1.09875 - AUD Australian dollar: 0.72440 - CAD Canadian dollar: 0.78371 - Institutional definition: The general government comprises the central government and local governments, excluding Legal Entities of Public Law. Excludes state-owned companies and the Partnership Fund. Public sector consists of the general government, Legal Entities of Public Law and public financial and non-financial corporations, including the National Bank of Georgia and the Partnership Fund. - Data provision commitments: - Treasury Dept., Ministry of Finance to provide monthly revenues within two weeks of month-end and monthly expenditures and arrears 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 end of each quarter. - Treasury to provide daily cash balances in all general government accounts as of end of previous business day. - Quantitative program targets include performance criteria on: augmented cash deficit, net budget lending, NIR of the NBG, accumulation of external debt arrears, new guarantees issued by the public sector, cash deficit of the Partnership Fund, new investments by the Partnership Fund, new net borrowing by the Partnership Fund; and indicative targets on new domestic expenditure arrears and primary current spending. - Standard Fund arrangement performance criteria: (i) no imposition or intensification of restrictions on the making of payments and transfers for current international transactions; (ii) no introduction or modification of multiple currency practices; (iii) no conclusion of bilateral payments agreements inconsistent with Article VIII of the IMF Articles of Agreement; (iv) no imposition or intensification of import restrictions for balance of payments reasons — monitored continuously. ### Inflation consultation mechanism - Test date inflation defined as year-on-year percentage change of the monthly CPI in the month of the test date as measured and published by GEOSTAT. - If test date inflation falls outside the outer bands in Table 1, authorities will complete a consultation with the IMF Executive Board, focusing on: (i) stance of monetary policy and whether the Fund-supported program remains on track; (ii) reasons for the deviation; (iii) proposed policy response. Access to Fund resources would be interrupted until consultation and relevant program review are completed. - If inflation falls outside the inner bands, authorities will complete a consultation with IMF staff on reasons and proposed policy response. ### Program definitions, adjustors, and reporting requirements General government ceilings and definitions - Augmented cash balance definition: revenues minus expenses, minus net acquisition of non-financial assets (GFSM 2001) minus net budget lending. - Measurement: Augmented cash balance measured from financing side at current exchange rates established by NBG at transaction date. Adjustors to ceilings - Adjust downward the ceiling on the augmented cash deficit by cumulative receipts from sale of non-financial assets above program amounts (Table 2). - Adjust the ceiling on net budget lending upward/downward by cumulative on-lent amounts from foreign-financed project loan disbursements above/below program amounts (Table 2). - Adjust the ceilings on the augmented cash deficit and the primary current spending (indicative target) upward for healthcare costs related to preventing the spread of COVID-19 and treating COVID-19 cases in excess of the originally planned amount (excluding vaccination costs) for up to GEL 200 million. Ceilings will be adjusted upward by 50 percent for any additional health spending above GEL 200 million (the remaining 50 percent should be met through cuts in other spending or increases in revenue). - Activities included for the adjustor exclude vaccination costs and are defined by: - Government Decree #164 28.01.2020 “On approval of preventive measures against spread of Novel Coronavirus and operational plan on treating diseases caused by the Novel Coronavirus”: Article 4.1 and Article 4.8; Annex #20 “Managing Novel COVID-19” of Government Decree #4 12.01.2022 “On Approving 2022 Healthcare Programs” - Government Decree #47 01.02.2022 “On approving 2022 State Program of Rehabilitating and equipping Medical Facilities”. Projected financing for cash deficit of the general government (Table) - Jun. 30, 2022 / Dec. 31, 2022 - Healthcare costs related to prevent the COVID-19 spread and treating COVID-19 cases: 350 / 500 (in millions of GEL) - Receipts from sale of non-financial assets: 175 / 450 (in millions of GEL) - On-lent amounts from project loan disbursements: 85 / 205 (in millions of GEL) Supporting material and reporting timelines (selected) - Data on domestic bank and nonbank financing provided by NBG and Treasury within four weeks after end of each month. - Data on external project financing and other external borrowing provided monthly by Ministry of Finance within two weeks of month-end (specifying projects by creditor). - Healthcare spending categories specified under relevant Government Decrees. - Data will be provided at actual exchange rates. - Treasury to provide monthly data on receipts from sales of non-financial and financial assets within two weeks of month-end. - NBG to report securitized debt sold by the NBG, including securities purchased by nonbanks, monthly within two weeks of month-end. - Georgia Revenue Service to provide by end of each month for previous month: - Number and GEL value of claims for VAT credits submitted within 30 calendar days - Number and GEL value of VAT refunds paid under the Automatic VAT System (AVS) within 30 calendar days - Number and GEL value of VAT cash refunds paid automatically within 30 calendar days - Number and GEL value of VAT credits offset automatically within 30 calendar days - Number and GEL value of VAT credits permanently disallowed within 30 calendar days - Number and GEL value of VAT credits manually reviewed in less than 30 calendar days - GEL value of the old stock of VAT credits Definitions - Net budget lending: net acquisition of financial assets for policy purposes by the general government (consistent with GFSM 2001). - Primary current expenditures: expenses (GFSM 2001) on a cash basis, minus interest payments. *Source: IMF staff and Technical Memorandum of Understanding as included in the provided content.* ### 17. Supporting material: Data for monitoring expenditures will come from the accounts ### 17. Supporting material: Data for monitoring expenditures will come from the accounts ### Monitoring of general government expenditures - Data source: accounts of the general government covered under the ceiling on the augmented cash deficit of the general government (including autonomous regions). - Responsibility: The Ministry of Finance is responsible for providing reporting according to the above definition. - Reporting timetable: Data on expenses and net acquisition of non-financial assets of the general government should be reported to the IMF within four weeks after the end of the quarter. ### Continuous Performance Criterion on Accumulation of General Government External Debt Arrears - Definition references: - Debt defined as set forth in point No. 8 of the Guidelines on Public Debt Conditionality in Fund Arrangements (Decision No. 15688-(14/107) adopted on December 5, 2014). - External debt defined by the residency of the creditor. - Program definition of external payment arrears: - All overdue debt service obligations (payments of 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. - Scope and exceptions: - Ceiling on new external payments arrears applies continuously throughout the arrangement. - Does not apply to external payments arrears arising from external debt being renegotiated with external creditors, specifically arrears where a creditor has agreed that no payment needs to be made pending negotiations. - Supporting material and reporting: - Accounting of non-reschedulable external arrears by creditor (if any), with detailed explanations, will be transmitted monthly, within two weeks of the end of each month. - Footnote note: - Arrears to Turkmenistan. ### Continuous Indicative Target on Accumulation of General Government Domestic Expenditure Arrears - Definition: - Domestic expenditure arrears are non-disputed (in or out of court) payment obligations whose execution term has expired and become overdue. - Can arise on any expenditure item, including debt service, wages, pensions, and goods and services. - Arise from non-debt liabilities that are not paid after 60 days of the contractual payment date or—if there is no contractual payment date—after 60 days of the receivable. - Any wage, pension or other entitlement obligation of the general government that is not paid after a 30-day period from the date that they are due, is in arrears. - Supporting material and reporting: - Accounting of new domestic expenditure arrears (if any) will be transmitted within four weeks after the end of each month. ### Continuous Ceiling on the New Guarantees Issued by the Public Sector - Definition: - A guarantee of a debt arises from any explicit legal obligation of the public sector to service such a debt in the event of nonpayment by the recipient (involving payments in cash or in kind). - Supporting material and reporting: - The Ministry of Finance will provide to the IMF information on any new guarantees issued by the public sector within 4 weeks after the end of each quarter. ### Partnership Fund — Cash Deficit, Net Borrowing, and New Investments - Ceiling on the Cash Deficit of the Partnership Fund - Definition: Cash deficit measured as expenditures minus revenues. - Revenues: dividends from assets and investments, interest earnings from loans it provides, fees charged for services and guarantees, and any other income earned from its assets. - Expenditures: all current and capital expenditures. - Current expenditures: compensation of employees, purchase of goods and services, transfers to other entities, other account payables, domestic and external interest payments. - Capital expenditures: net acquisition of nonfinancial assets as defined under GFSM 2001. - Exclusions: Purchase of financial assets (e.g., lending and equity participation) is not considered part of expenditures. - Continuous Ceiling on New Net Borrowing by the Partnership Fund - Definition: Net borrowing = contracted debt liabilities minus principal repayments. - Supporting material and reporting: - The Ministry of Finance will provide detailed information on the Partnership Fund’s quarterly revenue, expenditure, and amounts related to new contracted debt and principal repayments, within four weeks of the end of each quarter. - Continuous ceiling on New Investments by the Partnership Fund - Definition: New investments = gross acquisition of non-financial and financial assets, excluding (i) currency and deposits and (ii) other accounts receivables. - Exclusions: Transactions unambiguously required by contractual obligations established before November 1, 2019. - Supporting material and reporting: - The Ministry of Finance will provide detailed information on the Partnership Fund’s quarterly acquisition of financial and non-financial assets within four weeks of the end of each quarter. - The Ministry of Finance will notify the IMF about transactions required by preexisting contractual obligations within 10 days of their occurrence and provide the necessary documentation establishing such obligation. ### Net International Reserves (NIR) — Floor for the NBG - Definition of NIR (in U.S. dollars): - NIR = foreign assets of the NBG minus the sum of foreign liabilities of the NBG, including all of Georgia’s liabilities to the IMF (excluding the SDR allocations). - Foreign assets include: gold, gross foreign exchange reserves, Georgia’s SDR holdings, and the reserve position in the IMF. - Gross foreign exchange reserves: liquid, convertible currency claims of the NBG on nonresidents, including cash holdings of foreign exchange that are readily available. - Pledged or otherwise encumbered assets, including assets used as collateral (or guarantee for third party external liabilities), are excluded from foreign assets. - Foreign liabilities: sum of Georgia’s outstanding liabilities to the IMF (at face value) 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 and SDR allocations. - For program monitoring purposes, foreign assets and foreign liabilities of the NBG shall be valued at program exchange rates as described in paragraph 2 above. - Stock level: - The stock of NIR amounted to $1,725 million as of December 31, 2021 (at program exchange rates). - Budget support definitions: - Budget support grants: grants received by the general government for direct budget support from external donors and not related to project financing. - Budget support loans: disbursements of commercial loans and loans from bilateral and multilateral donors for budget support. - Adjustors to the NIR floor: - Upward (downward) by any excess (shortfall) of privatization revenue in foreign exchange above (below) the programmed amounts (Table 3). 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 (Millions of U.S. dollars; Cumulative from January 1, 2022) - Jun. 30, 2022: Projected privatization revenue 0.0; Budget support grants 0.0; Budget support loans, including bilateral and multilateral donors for budget support 33.0; Project loans and grants 153.1. - Dec. 31, 2022: Projected privatization revenue 0.0; Budget support grants 18.9; Budget support loans, including bilateral and multilateral donors for budget support 323.3; Project loans and grants 218.9. - Supporting material and reporting: - 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 on a weekly basis within three working days following the end of the week. ### Statement by Mr. Rashkovan and Mr. Tsur on Georgia (June 15, 2022) — Authorities’ views and policy commitments - General assessment: - The Georgian authorities thank staff for the dedicated and constructive engagement and view the suggested IMF program as a vehicle to continue and communicate strong short- and long-term policies. - Diagnosis: With good institutions, credible fiscal and monetary policies, and proven commitment to reforms, Georgia has significant potential to maintain sustainable and inclusive growth. - Recent shocks: COVID-19 and Russia’s invasion of Ukraine increase uncertainty and inflationary pressures. - Real macroeconomic outlook and recent data: - Average real GDP increased by 10.8 percent between January -April and grew in April by 2.6 percent YoY. - Value Added Taxpayers’ turnover increased by 11.7 percent growth YoY during January-April. - Exports of goods increased by 33 percent YoY in January-April 2022. - Goods imports increased by 34 percent YoY in January-April 2022. - In January-March, revenues from international travel increased approximately 7.4-fold YoY, though still 32 percent of the corresponding pre-pandemic period of 2019. - Fiscal policy commitments and medium-term targets: - Government objective: reduce the deficit from 6.1 in 2021 to 4 percent of GDP in 2022. - Planned debt and deficit path: - Reduce general government debt to 45 percent, approaching below 50 percent as early as 2024. - Gradually reduce the government deficit from 4.0 percent of GDP in 2022 to 2.8 and 2.3 percent of GDP in 2023 and 2024, respectively. - Financing of support to vulnerable groups: government support to vulnerable households and subsistence farmers will be financed by windfall revenue and spending reprioritization. - Revenue mobilization: deepen revenue mobilization by improving tax administration and modernizing property tax, among others. - Public financial management and SOE reforms: - Commitment to reform SOEs: ensure clear separation between the state’s shareholder and policymaking functions, with the Ministry of Finance approving all key financial decisions. - Cabinet approved a decree formalizing the separation and met the prior action. - Government published a draft comprehensive reform strategy for SOEs supported by IMF TA. - On-lending to public corporations only if the enterprise commits to reform to increase profitability and investment potential of SOEs. - Ministry of Finance will include SOEs classified as general government units in the general government perimeter to increase budget transparency. - Georgia ranked first in the Open Budget Survey released by the International Budget Partnership (IBP) for 2021. - Recent PFM reforms supported by IMF TA include improved midterm planning, introduction of program budgeting, increased scope of accountability, electronic PFM system, publication of budget documentation, citizen engagement guidelines, and citizen participation mechanisms. - Monetary policy stance and inflation: - Inflation: 13.3 percent in the last 12 months, including May. - NBG forecast: inflation will remain high in 2022 on average but decline during the second half of 2022 and the first half of 2023 as one-off effects phase out and given that monetary policy remains tight. - Policy action: NBG increased its policy rate by 3 percentage points in March 2021. - Exchange rate and reserves: floating exchange rate regime continues to work as a shock absorber; NBG purchased foreign exchange using an FX auction last month for the first time after more than two years. - Financial sector resilience and macroprudential measures: - The NBG and authorities acted swiftly following Russia’s invasion of Ukraine and related sanctions to mitigate specific financial difficulties (example: transfer of VTB branch assets and liabilities to other banks). - The NBG mandated compliance with US, EU, and UK sanctions from day one and enhanced sanctions monitoring. - Macroprudential measures taken: - Reduced maximum maturity of FX mortgages from 15 years to 10 years. - Strengthened some payment-to-income requirements. - Consideration of increasing the upper bound of FX reserve requirements (currently at 25 percent) if needed to reduce foreign currency loan growth. - NBG will formalize and improve governance of supervisory processes, codify its General Risk Assessment Program, update guidelines, and enhance crisis contingency plans for banks. - Structural reform priorities: - Expand renewable power generation capacity and reduce reliance on imported power. - Improve IT infrastructure to facilitate digitalization in private and public sectors. - Advance core infrastructure investments, including major highway corridors to integrate regions and support Georgia as a transport and logistics hub. - Review social protection measures, including policies to reduce the gender gap in the labor market. - Prioritize educational reforms focused on early and pre-school education, improve teacher quality, increase funding for education, and reform vocational education to adopt European standards for certification. - International cooperation: - Georgia expects continued close cooperation with international partners, including the IMF, the World Bank, the US, and the European Union to catalyze resources for reforms and infrastructure projects. - The new SBA is a top priority to maintain reform momentum and market confidence in Georgia’s economy. *Source: 1geoea2022002 - 17. Supporting material: Data for monitoring expenditures will come from the accounts* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1geoea2022002.pdf_