## 1geoea2022004

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---

### Executive summary — context and recent economic developments
- Georgian economy performed strongly in 2022; adverse spillovers from the war in Ukraine have not materialized thus far.
- Key drivers of stronger-than-expected performance:
  - Buoyant tourism revenues, including spending by migrants.
  - A surge in war-related immigration and financial inflows.
  - A rise in transit trade through Georgia.
- Macroeconomic outcomes and indicators:
  - Real GDP grew by 10 percent y/y during January-October 2022 (flash estimate).
  - Real GDP (2022 actual, Table 1): 3.2.
  - Strong activity in transportation and storage, construction, and other services.
  - Inflation: from 12.8 percent y/y in June to 10.4 percent y/y in November; CPI Period average for 2022: 10.9; CPI End-of-period for 2022: 8.1; core inflation at 7.1 percent y/y in November (core CPI for 2022 not reported in Table 1).
  - Wage growth: 16.1 percent y/y in 2022Q2.
  - Policy rate: NBG kept policy rate on hold at 11 percent since March.
  - Lari: appreciated by 17 percent in nominal effective terms from pre-war levels through end-October; elsewhere noted as over 13 percent since program approval.
  - NBG net FX purchases of $350 million between March and October, raising GIR to about $4.4 billion (October 2022) and GIR in 2022 (Table 1) reported as 3.3 (in billions of US$).
  - Fiscal deficit through October: 0.9 percent of GDP.
  - Revenue overperformance: revenues grew rapidly, led by income taxes and VAT receipts; revenue overperformance in 2022 expected to be about GEL 1.9 billion for the full year.
  - Credit growth (y/y in constant exchange rates) slowed to 13.8 percent in October; credit to the private sector (annual percent change) 2022: 20.9.
  - Banking sector metrics as of September:
    - Capital adequacy ratio: 20.6 percent.
    - Return on equity: 29 percent.
    - Liquidity ratio: 23 percent.
    - Nonperforming loans (NPLs): 4.5 percent (1.9 percent by the IMF’s measure).
    - Restructured loans: 16 percent.
    - Loan dollarization: 45 percent.
    - Deposit dollarization: 57 percent (Table 1 reports deposit dollarization 2022: 60.0; credit dollarization 2022: 50.9).
- Sanctions and financial stability:
  - NBG instructed financial institutions to adhere to US, EU, and UK financial sanctions; SWIFT links with unsanctioned Russian banks remain operational; largest Georgian banks retained western correspondent banking relationships.
  - Transfer of VTB Georgia’s license to a new owner remains pending.
- Political environment:
  - EU decision offered a “European perspective” and a roadmap of 12 reform priorities; government produced an action plan and working groups, but cooperation with opposition parties is limited.

### Outlook and risks
- Growth projections:
  - 2022: growth of 10 percent with a positive output gap (flash estimate Jan–Oct 2022).
  - 2023: growth expected to slow to 4 percent.
  - 2024: growth expected to converge to potential of around 5 percent.
- Inflation and current account projections:
  - Inflation projected to average 12 percent in 2022, ease to 6 percent in 2023, and converge to the NBG’s 3 percent target in 2024.
  - Current account deficit: expected to narrow to 5.6 percent of GDP in 2022, widen to 6.6 percent of GDP in 2023, and gradually decrease to 5.3 percent of GDP by 2027.
  - Higher-than-expected private external inflows and a lower current account deficit facilitate NBG reserve purchases; GIR in 2022 could be around $1 billion higher relative to program approval (or 19 percentage points of the ARA metric, taking coverage to 99 percent).
- Key downside risks:
  - Weaker trading partner growth, tighter global financial conditions, lower external inflows (including tourism), reversal of recent inflows, sustained high global food and energy prices, further deterioration of the war in Ukraine, or sanctions on Russia.
  - Depreciation would increase public debt burdens given high FX share, although public debt is sustainable and expected to decline.
- Upside risks:
  - Faster tourism recovery, higher capital inflows, further war-related migration of workers and companies, and increased transit trade — noting these could increase inflation pressures.
- Uncertainty: risks are balanced but overall uncertainty is high (Annex I).

### Program status, performance criteria, and structural benchmarks
- Program status:
  - All end-June and continuous quantitative performance criteria (QPCs) for the first review were met.
  - Fiscal and reserve balance targets met with substantial margins.
  - June inflation was within the inner bands of the consultation target.
- Structural benchmarks (SBs) and prior actions (selected):
  - Met: reporting tax expenditures; processing VAT credits automatically; improving financial risk supervision governance; subjecting large investments to the PIM framework; publishing a climate-related financial risk assessment (end-December SB); PIMA update met ahead of schedule.
  - Some end-July and end-August SBs on SOE reform and ownership of Georgian State Electrosystem were implemented as prior actions and expected to be met by mid-December.
  - Prior actions regarded as critical to limit fiscal risks.
- Quantitative performance highlights (selected, in millions of GEL or US$, cumulative where noted):
  - Ceiling on augmented cash deficit (program definition): 1,370; actual through mid-year: 172; end-December revised ceiling: 2,740.
  - Floor on NIR of NBG (end-period stock, million of U.S. dollars): 1,204; actual June 30, 2022: 1,602; proposed end-December firm target raised to 1,610 (program modification request).
  - Indicative target — Ceiling on primary current expenditures of the general government: 7,030; actual through mid-year: 7,052 (Not met); end-December indicative ceiling revised from GEL 14.2 billion to GEL 15 billion.

### Fiscal policy, consolidation, and public investment management (PIM)
- 2023 deficit target: 2.8 percent of GDP (budget and program), complying with the fiscal rule’s 3 percent of GDP ceiling (MEFP ¶7).
- Implied negative fiscal impulse: a 1.2 percent of GDP decline in the cyclically adjusted primary balance (CAPB).
- Fiscal deficit projected for 2024-25: 2.3 percent of GDP; implied CAPB adjustment in 2024: 0.7 percent of GDP.
- Public debt objective: around 40 percent of GDP in the medium term (below the fiscal rule ceiling of 60 percent of GDP).
- Composition of consolidation and priorities:
  - Balanced consolidation in 2023 with modest reduction in capital expenditure as major projects approach completion, allowing reasonable current spending.
  - Phasing out COVID-related healthcare costs; increase in public sector salaries to narrow gap with private sector wages.
  - Continued investments prioritized in road, rail, port, energy, logistics, and undersea cable projects to enhance transit trade potential, energy independence, and connectivity with Europe.
- PIM developments:
  - Budget code amended to subject all investments above a threshold to the PIM framework; threshold identified with IMF TA and to be adopted via government decree in December.
  - All new 2023 investment projects over the specified threshold selected according to PIM guidelines (December 2022 SB).
  - Updating PIM methodology per PIMA recommendations and developing a digital PIM module.
  - First Climate PIMA conducted in 2022 found good practices and scope to enhance climate awareness and resilience in PIM.
- Revenue mobilization and VAT:
  - Schedule for annual tax expenditure reporting established; first tax expenditure report published (December 2022 SB).
  - Tax expenditure review for VAT and income taxes to be completed by June 2023 (SB).
  - Automatic processing of VAT refunds to continue; committed to reduce audited VAT stock to no more than GEL 70 million (end-December 2022 SB, revised up from GEL 50 million).
  - Staff recommendations: early review and streamlining of tax expenditures, modernize property tax, develop a Medium-Term Revenue Strategy (MTRS) (March 2024 SB).
- Supplementary 2022 fiscal actions:
  - Additional current spending to avoid too large a drop in real outlays; additional capital expenditures including frontloading payments of around GEL 230 million.
  - Additional budget lending of about GEL 200 million to enable gas purchases by an SOE.
  - Authorities requested raising December 2022 indicative ceiling on primary current expenditure from GEL 14.2 billion to GEL 15 billion and raising QPC ceiling on net budget lending from GEL 75 million to GEL 275 million to accommodate GOGC gas purchases.
  - Quasi-fiscal activities by the GOGC to be significantly curtailed by mid-2023 to facilitate repayment of budget lending in 2023-24.

### State-owned enterprise (SOE) reforms and renewable energy support
- SOE reform strategy:
  - To be finalized and adopted as a prior action; dual ownership model: 50 percent Ministries of Finance and Economy each, ensuring strong Ministry of Finance role and veto over key decisions.
  - Strategy elements: commercial principles, independent supervisory boards, avoidance of quasi-fiscal activities unless explicitly mandated and compensated.
  - Timebound implementation plan to pilot the strategy in three major SOEs starting Q1 2023: Georgian Railway, Georgian Gas Transportation Company, and United Airports of Georgia.
  - Draft SOE framework law reset to end-September 2023 SB given delay.
  - Ownership of Georgian State Electrosystem determined to be shared equally between the Ministries of Finance and Economy (prior action).
- Renewable energy support scheme (prior action met):
  - All projects to be awarded through competitive auctions.
  - Costs of the scheme passed on to final consumers to mitigate fiscal risks.
  - First phase (2022-2023): total capacity of 300 MW to be auctioned; scheme envisages support for up to 1,500 MW over three years (MEFP).

### Monetary policy, inflation management, and reserves
- Monetary stance and actions:
  - NBG intends to maintain policy rate at 11 percent until a clear trend of decreasing inflation is seen; further tightening may be necessary (MEFP ¶20).
  - One-year-ahead inflation expectations remain around 5½ percent.
  - Further policy rate hikes would slow credit growth, reduce demand (many floating rate loans), affect expectations, and increase incentives to hold lari assets (potentially reducing deposit dollarization).
  - Macroprudential measures complement monetary policy, including limits on FX lending and CICR buffer recalibration.
- Reserves and FX policy:
  - Commitment to exchange rate flexibility and strengthening FX reserve coverage (MEFP ¶21-¶22).
  - With stronger-than-expected external inflows in 2022, NBG undertook substantial reserve purchases; December 2022 NIR target raised from $840 million to $1.6 billion (program modification request presented as raising to $1.61 billion in some QPC listings) to lock in gains and build buffers.
  - GIR coverage in ARA metric: significantly higher than program approval at end-2022; NBG projected GIR to ARA about 99 percent by end-2022 and to reach about 113 percent by 2027.
  - To facilitate reserve build-up, authorities will phase out direct FX sales to SOEs during 2023.
  - NBG committed to updating communication strategy (December 2022 SB) and to consider modifications to organizational/decision-making structure with IMF TA.
- Program exchange rates for monitoring (TMU):
  - GEL Georgian lari: 0.30939 (Equivalently, 1 US$ = 3.23220 GEL).
  - EUR Euro: 1.09875.
  - SDR: 1.37933.

### Financial sector resilience, macroprudential measures, and AML/CFT
- System-wide status:
  - Banking system weathered shocks well; liquidity substantial, capital buffers adequate, profitability high; NPLs and watch loans declining; restructured loans remain higher in some sectors.
- Macroprudential and supervisory measures (selected):
  - Recalibrated Currency Induced Credit Risk (CICR) buffer (effective January 1st).
  - Lowered maximum maturity of mortgage loans from 15 to 10 years (effective January 1st).
  - Increased income threshold for stricter PTI ratio from GEL 1000 to GEL 1500 (effective April 1st).
  - Introduced a 3 ppt interest rate shock in calculating PTI on floating rate loans (effective May 1st).
  - Reduced maximum term of consumer loans from 4 to 3 years (effective August 15th).
  - Set remuneration on banks’ required reserves to zero for USD (effective May 13th) and euro (effective September 15th) liabilities.
  - Considering further strengthening capital buffers and limiting FX lending risks for unhedged borrowers.
- AML/CFT and sanctions risk:
  - NBG instructed adherence to US, EU, and UK sanctions; created a specialized sanctions unit in June 2022.
  - Automated sanction screening by NBG and enhanced reporting from banks and payment service providers on customers connected to Russia, Belarus, and other risk-bearing countries.
  - From January 2023 NBG will start supervising VASPs under rigorous AML/CFT standards.
- Recovery, resolution, and market development:
  - Develop a playbook to make the bridge bank tool operational (end-March 2023 SB).
  - Strengthen corrective action framework and bank resolution preparedness; enhance supervisory governance and capital markets development (covered bonds, securitization, dematerialized securities, benchmark bonds).

### Growth, inclusion, social protection, and structural reforms
- Labor market and skills:
  - Ministry of Health and Labor to conduct a survey of labor and skills demand (June 2023 SB) to inform vocational training and teacher testing/training.
  - Parliamentary and government reports on legislative gaps and active labor market policies due by end of year.
  - Public Employment Works Program launched March 2022 to support transition from TSA to formal employment.
- Social safety nets:
  - Improvements to Targeted Social Assistance by updating the proxy-means-testing formula and digitalizing the system; target to reduce TSA application-to-disbursement time from four months to one month.
- Governance and business environment:
  - Implemented insolvency law; bill introduced to establish a National Anti-Corruption Bureau.
  - Further reforms (e.g., judicial independence) would improve business environment and attract foreign investment.
- Infrastructure prioritization:
  - Prioritize subset of infrastructure projects (roads, rail, ports, logistics, energy, undersea cable) given limited fiscal space; coordinate donors, evaluate feasibility, and assess fiscal risks.

### Risk Assessment Matrix (Annex I) — conjunctural, structural, and Georgia-specific risks
- Conjunctural risks (likelihood / expected impact / policy responses — selected):
  - Intensifying spillovers from Russia’s war in Ukraine — Likelihood: High; Expected Impact: Medium. Responses: flexible exchange rate, use FX reserves, tight monetary policy, diversify trade markets, monitor sanctions risk management.
  - Commodity price shocks — Likelihood: High; Expected Impact: High. Responses: maintain tight monetary policy, reprioritize spending for targeted support, draw on SBA financing if needed.
  - Systemic social unrest — Likelihood: High; Expected Impact: High. Responses: improve communication, maintain reform ownership, use reserves to prevent disorderly depreciation.
  - Abrupt global slowdown or recession — Likelihood: High; Expected Impact: High. Responses: allow exchange rate adjustment, use policy space to protect vulnerable, use reserves, draw on SBA if needed.
  - De-anchoring of inflation expectations and stagflation — Likelihood: Medium; Expected Impact: High. Responses: flexible exchange rate, further tighten monetary policy, reprioritize spending.
- Structural risks:
  - Deepening geo-economic fragmentation — Likelihood: High; Expected Impact: Medium. Responses: exchange rate adjustment, use monetary policy space if inflation falls, targeted support through reprioritized spending.
- Georgia-specific structural risks:
  - Financial risks (dollarization and depreciation) — Likelihood: Medium; Expected Impact: Medium. Responses: tight monetary policy, FX flexibility, use reserves, strengthen resolution framework, use buffers, adjust macroprudential measures.
  - Fiscal risks (contingent liabilities) — Likelihood: Medium; Expected Impact: High. Responses: improve SOE governance, strengthen revenue-raising capacity, seek IFI support.
  - Political risks — Likelihood: Medium; Expected Impact: Medium. Responses: maintain macroeconomic discipline, strengthen social safety nets.

### Downside scenario (Annex II) — shocks, magnitudes, and macro implications
- Scenario design: combined adverse shocks from (i) negative spillovers from the war in Ukraine, (ii) lower growth in major trading partners, and (iii) further increases in commodity prices.
- Assumed shock magnitudes:
  - Commodity prices: 10 percent higher in 2023 compared to the baseline, before gradually declining to baseline levels in 2025.
  - Remittances: net remittances 5 percent lower than the baseline in 2023, and 2.5 percent lower in 2024.
  - Services exports/tourism: tourism revenue 15 percent lower than the baseline in 2023, and 7.5 percent lower in 2024; implies tourism revenue falls to 3 percent below the 2019 level in 2023.
  - Goods exports: merchandise exports 5 percent lower than the baseline in 2023, and 2.5 percent lower in 2024.
  - Capital outflows: nonresidents sell all their holdings of local government bonds: $130 million in 2023; nonresident deposits decline by 15 percent in 2023 and 7.5 percent in 2024 relative to baseline.
- Macroeconomic effects:
  - Lari would depreciate by 10 percent compared to the baseline in 2023.
  - Current account balance deteriorates by 3.7 percentage points of GDP in 2023 and 0.2 percentage points in 2024 relative to the baseline.
  - Reserves would fall to 66 percent of the ARA metric by 2024 (16 percentage points lower than the baseline in 2024) absent additional external financing.
  - Inflation and exchange rate effects: lari depreciation and higher commodity prices add to inflation in 2023–24 and delay return to target until end-2024.
  - Policy response: maintain tight monetary policy, allow exchange rate to act as shock absorber, use reserves to prevent disorderly adjustment, prioritize targeted fiscal support within 3 percent of GDP fiscal rule, and draw on the SBA to reach 75 percent of the ARA metric by end-2025.

### Program modalities, conditionality changes, financing, and safeguards
- Requested program modifications (selected):
  - Raise end-December QPC floor on net international reserves from $840 million to $1.61 billion.
  - Raise end-December QPC ceiling on net budget lending from GEL 75 million to GEL 275 million to support GOGC gas purchases.
  - Raise end-December indicative ceiling on primary current expenditure from GEL 14.2 billion to GEL 15 billion.
  - Modify end-December SB on audited stock of VAT declarations cleared for payments from no more than GEL 50 million to GEL 70 million.
  - Reset various SB deadlines (e.g., draft framework law for public corporations to end-September 2023; MTRS to end-March 2024).
- Financing and repayment capacity:
  - Program fully financed with firm commitments for next 12 months and good prospects for full arrangement period.
  - Debt service to the IMF manageable; if all drawings made and an adverse scenario materializes, capacity to repay would remain adequate with obligations reaching 0.7 percent of GDP in 2027 (1.3 and 5.4 percent of exports and GIR) (Table 7 referenced).
- Safeguards assessment:
  - Updated Safeguards Assessment of the NBG finalized in July found framework generally strong and well aligned with leading practices.
  - Independent oversight by the Board constrained by an executive majority due to vacancies in non-executive positions; legal amendments necessary to address this gap.
  - NBG committed to addressing safeguards recommendations and has requested IMF TA.

### Key fiscal and macro-financial figures (selected, as reported)
- Real GDP: 3.2 (2022 actual).
- Nominal GDP: 69.0 (billion of laris, 2022 actual).
- Nominal GDP: 22.3 (billion of U.S. dollars, 2022 actual).
- GDP per capita: 6.0 (thousand of U.S. dollars, 2022 actual).
- Gross national saving (percent of GDP) 2022: 9.6.
- Investment (percent of GDP) 2022: 20.6.
  - Public investment (percent of GDP) 2022: 8.0.
  - Private investment (percent of GDP) 2022: 12.5.
- Revenue and grants (percent of GDP) 2022: 25.2.
  - o.w. Tax revenue (percent of GDP) 2022: 22.8.
- Expenditures (percent of GDP) 2022: 29.1.
- Augmented Net lending / borrowing (program definition) 2022: -4.0 (percent of GDP).
- General government debt 2022: 47.1 (percent of GDP).
  - Foreign-currency denominated (percent of total) 2022: 37.5.
- Gross international reserves (in billions of US$) 2022: 3.3.
- Gross external debt 2022: 85.8 (percent of GDP).
- Credit to the private sector (annual percent change) 2022: 20.9.
- Broad money (annual percent change) 2022: 19.9.
- Deposit dollarization (percent of total) 2022: 60.0; credit dollarization (percent of total) 2022: 50.9.

*Source: 1geoea2022004 — IMF staff and Georgian authorities (Executive Summary; MEFP; Annex I and II; Attachment I).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and Recent Economic Developments
- The Georgian economy performed strongly in 2022 as adverse spillovers from the war in Ukraine have not materialized thus far.
- Key drivers of stronger-than-expected performance:
  - Buoyant tourism revenues, including spending by migrants.
  - A surge in war-related immigration and financial inflows.
  - A rise in transit trade through Georgia.
- Macroeconomic outcomes and indicators:
  - Real GDP grew by 10 percent y/y during January-October 2022 (flash estimate).
  - Strong activity in transportation and storage, construction, and other services.
  - Inflation: from 12.8 percent y/y in June to 10.4 percent y/y in November; core inflation at 7.1 percent y/y in November.
  - Wage growth: 16.1 percent y/y in 2022Q2.
  - Policy rate: NBG has kept the policy rate on hold at 11 percent since March.
  - Lari: appreciated by 17 percent in nominal effective terms from pre-war levels through end-October.
  - NBG net FX purchases of $350 million between March and October, raising gross international reserves (GIR) to about $4.4 billion.
  - Fiscal deficit through October: 0.9 percent of GDP.
  - Revenue overperformance and composition: revenues grew rapidly, led by income taxes and VAT receipts, and unusually high corporate income tax collection.
  - Credit growth: total credit growth (y/y in constant exchange rates) slowed to 13.8 percent in October.
  - Banking sector metrics as of September:
    - Capital adequacy ratio: 20.6 percent.
    - Return on equity: 29 percent.
    - Liquidity ratio: 23 percent.
    - Nonperforming loans (NPLs): 4.5 percent (1.9 percent by the IMF’s measure).
    - Restructured loans: 16 percent.
    - Loan dollarization: 45 percent.
    - Deposit dollarization: 57 percent.
- Sanctions and financial stability:
  - NBG instructed financial institutions to adhere to US, EU, and UK financial sanctions.
  - SWIFT links with unsanctioned Russian banks remain operational; largest Georgian banks retained western correspondent banking relationships.
  - Transfer of VTB Georgia’s license to a new owner remains pending.
- Political environment:
  - EU decision offered a “European perspective” and a roadmap of 12 reform priorities; government produced an action plan and working groups, but cooperation with opposition parties is limited.

### Outlook and Risks
- Growth projections:
  - 2022: growth of 10 percent with a positive output gap.
  - 2023: growth expected to slow to 4 percent.
  - 2024: growth expected to converge to potential of around 5 percent.
- Inflation and current account projections:
  - Inflation projected to average 12 percent in 2022, ease to 6 percent in 2023, and converge to the NBG’s 3 percent target in 2024.
  - Current account deficit: expected to narrow to 5.6 percent of GDP in 2022, widen to 6.6 percent of GDP in 2023, and gradually decrease to 5.3 percent of GDP by 2027.
  - Higher-than-expected private external inflows and a lower current account deficit are facilitating NBG reserve purchases and would contribute to significantly higher GIR in 2022 relative to program approval, by around $1 billion (or 19 percentage points of the ARA metric, taking coverage to 99 percent), despite a decline in borrowing from development partners.
- Key risk factors:
  - Downside risks: weaker trading partner growth, tighter global financial conditions, lower external inflows (including tourism), reversal of recent inflows, sustained high global food and energy prices, further deterioration of the war in Ukraine, or sanctions on Russia.
  - Impact of depreciation: would increase public debt burdens given the high FX share despite public debt being sustainable and expected to decline.
  - Upside risks: faster tourism recovery, higher capital inflows, further war-related migration of workers and companies, and increased transit trade (noting these could increase inflation pressures).
- Uncertainty: risks are balanced although uncertainty is high (Annex I referenced).

### Program Status and Performance
- Program status:
  - All end-June and continuous quantitative performance criteria (QPCs) for the first review were met.
  - Fiscal and reserve balance targets were met with substantial margins.
  - June inflation was within the inner bands of the consultation target.
- Structural benchmarks (SBs) and prior actions:
  - SBs met: reporting tax expenditures; processing VAT credits automatically; improving financial risk supervision governance; subjecting large investments to the public investment management (PIM) framework.
  - End-December SB on publishing a climate-related financial risk assessment met.
  - End-March 2023 SB on the PIMA update met well ahead of schedule.
  - Some end-July and end-August SBs (on SOE reform, ownership of Georgian State Electrosystem, timebound SOE reform implementation plan) were implemented as prior actions and expected to be met by mid-December.
  - End-July SB on developing a support scheme for renewable energy implemented as a prior action in November.
  - Prior actions regarded as critical to limit fiscal risks.

### Policy Discussions and Priorities
- Overall policy focus: reinforcing macroeconomic stability and maintaining reform momentum.
- Key policy priorities:
  - Monetary and external sector:
    - Maintain a sufficiently tight monetary policy stance to bring down high inflation.
    - Continue exchange rate flexibility.
    - Build up international reserves.
    - Strengthen financial sector resilience.
  - Fiscal policy and public finances:
    - Further fiscal consolidation to comply with the fiscal rule in 2023.
    - Strengthen public investment management.
    - Limit fiscal risks, including those from state-owned enterprises (SOEs) and the energy sector.
  - Growth and inclusion:
    - Foster more inclusive growth to reduce high unemployment.
- Specific fiscal actions and outcomes:
  - Revenue overperformance in 2022 expected to be about GEL 1.9 billion for the full year.
  - Projected 2022 deficit: around 3.1 percent of GDP compared to the program target of 4 percent.
  - Additional 2022 spending measures included:
    - Additional current spending to avoid too large a drop in real outlays given high inflation.
    - Additional capital expenditures including frontloading payments of around GEL 230 million to smooth spending pressures next year.
    - Additional budget lending of about GEL 200 million to enable gas purchases by an SOE.
  - Authorities requested raising the December 2022 indicative ceiling on primary current expenditure from GEL 14.2 billion to GEL 15 billion and the December 2022 QPC ceiling on net budget lending from GEL 75 million to GEL 275 million.
  - Supplementary budget includes support for vulnerable households and subsistence farmers and a newly launched public employment program.
  - Budget lending will help the Georgian Oil and Gas Corporation (GOGC) purchase gas early next year; quasi-fiscal activities by the GOGC will be significantly curtailed by mid-2023 to facilitate repayment of the budget lending in 2023-24.
- Financial sector vigilance:
  - Continued attention to macroprudential measures and banking sector resilience given changes in credit growth, dollarization trends, and nonresident deposits.

### Staff Views
- Given the authorities’ strong program performance, ownership, and reform commitments, staff supports completion of the first review and modifications to quantitative and structural targets.
- The authorities treat the program as precautionary and will only consider making purchases if the balance of payments deteriorates materially.

_Italic: Executive Summary, 1geoea2022004 - EXECUTIVE SUMMARY_

### 16.      The authorities are committed to a 2023 fiscal deficit that complies with the fiscal rule

### 16.      The authorities are committed to a 2023 fiscal deficit that complies with the fiscal rule 

### Fiscal stance, targets, and medium-term debt outlook
- Deficit target for 2023: 2.8 percent of GDP (budget and program), achieving compliance with the fiscal rule’s 3 percent of GDP ceiling in 2023 (MEFP ¶7).
- Implied negative fiscal impulse: a 1.2 percent of GDP decline in the cyclically adjusted primary balance (CAPB).
- Fiscal deficit projected for 2024-25: 2.3 percent of GDP.
- Implied CAPB adjustment in 2024: 0.7 percent of GDP.
- Public debt objective: around 40 percent of GDP in the medium term, below the fiscal rule ceiling of 60 percent of GDP (MEFP ¶8).

### Composition of fiscal consolidation and investment priorities
- Policy approach: balanced consolidation in 2023 with modest reduction in capital expenditure as major infrastructure projects approach completion, allowing reasonable current spending (¶17).
- Budget includes:
  - Phasing out of COVID-related healthcare costs.
  - Increase in public sector salaries to narrow gap with private sector wages.
- Authorities emphasize continued investments in road, rail, port, energy, logistics, and undersea cable projects to enhance transit trade potential, energy independence, and connectivity with Europe (MEFP ¶33).
- Improved public investment management (PIM) practices (¶21) to ensure high-quality capital spending; additional revenue (¶18) to accommodate priorities.

### Revenue mobilization and spending efficiency
- Actions taken:
  - Schedule for annual tax expenditure reporting established; first tax expenditure report published (December 2022 SB).
  - Tax expenditure review for VAT and income taxes to be completed next year, including cost-benefit analysis for key items (June 2023 SB).
  - Automatic processing of VAT refunds to continue (January 2023 SB).
  - Commitment to reduce stock of audited VAT payments, but target stock raised to GEL 70 million from GEL 50 million because some VAT payers prefer to keep credits with the government (MEFP ¶10).
- Staff recommendations:
  - Early review and streamlining of tax expenditures and improvement of tax administration.
  - Modernizing the property tax system.
  - Developing a medium-term revenue strategy (MTRS) (March 2024 SB).
- Expenditure reviews in select priority areas with IMF TA to improve spending effectiveness (MEFP ¶11).

### State-owned enterprise (SOE) reforms and governance
- Progress and commitments (MEFP ¶6, ¶13):
  - SOE reform strategy to be finalized and adopted as a prior action; incorporates a dual ownership model: 50 percent Ministries of Finance and Economy each, ensuring strong Ministry of Finance role and veto over key decisions.
  - Strategy elements: commercial principles, independent supervisory boards, avoidance of quasi-fiscal activities unless explicitly mandated and compensated.
  - Timebound implementation plan to pilot the strategy in three major SOEs starting in Q1 2023 (prior action). The three pilot SOEs: Georgian Railway, Georgian Gas Transportation Company, and United Airports of Georgia.
  - Draft SOE framework law development delayed to September 2023 SB given later finalization of the SOE strategy.
- Power sector unbundling to meet European Energy Community (EEC) commitments:
  - Requires an entity independent from ministries and the Prime Minister to own and oversee power generation SOEs.
  - Authorities will establish a council with a board appointed by Parliament and incorporate staff recommendations to ensure commercial objectives and a legal foundation consistent with the SOE strategy and forthcoming framework law.
  - Ownership of Georgian State Electrosystem determined and to be shared equally between the Ministries of Finance and Economy (prior action).

### Renewable energy support scheme
- Prior action completed: renewable energy support scheme guards against fiscal risks (MEFP ¶6).
- Design features:
  - All projects to be awarded through competitive auctions.
  - Costs of the scheme to be passed on to final consumers to mitigate fiscal risks.
  - First phase (2022-2023): total capacity of 300 MW to be auctioned.
  - Capacities for subsequent years to be determined based on updated demand and supply projections and progress on other energy projects.
  - Outstanding PPAs advancing during a 3-month assessment will move forward and be netted out of amounts supported under the new scheme; non-advancing projects may be terminated to limit fiscal risks.

### Public investment management (PIM) and climate integration
- PIM framework developments:
  - Budget code amended in September to subject all investments above a threshold to the PIM framework.
  - Appropriate threshold identified with IMF TA in November; threshold to be adopted via government decree in December.
  - All new 2023 investment projects over the specified threshold are being selected according to PIM guidelines (December 2022 SB).
  - Updating PIM methodology reflecting PIMA recommendations and developing a digital PIM module to track projects over their lifecycle.
- Climate PIMA:
  - First Climate PIMA conducted in 2022 found good practices, especially in risk management, and noted scope to enhance climate awareness and climate resilience in PIM.

### Fiscal risks, transparency, and other mitigations
- Measures being taken:
  - Reduce share of FX-denominated public debt to below 70 percent by 2025 to mitigate currency risk (MEFP ¶8).
  - Improve fiscal accounting and reporting quality in line with international standards (June 2023 SB).
  - Undertake a fiscal transparency evaluation in 2023 (MEFP ¶12).
  - 2022 Fiscal Risk Statement includes quantification of risks related to climate change and legal claims, and a long-term sustainability assessment for health and aging-related spending (December 2022 SB) (MEFP ¶17).
  - Continue to curtail Partnership Fund operations (QPCs) (MEFP ¶16) and limit government support for SMEs (MEFP ¶19).

### Pension reform consultations
- Amendments submitted to Parliament to create a third pension pillar and modify the second pillar (MEFP ¶18), including:
  - Broadened investment mandate of the Pension Fund (e.g., co-financing private projects with IFIs).
  - Raising concentration limits on the investment portfolio.
  - Modifying governance arrangements.
- Authorities to consult further with staff, development partners, and stakeholders, including consideration of potential fiscal costs related to a third pillar.

### Monetary policy, inflation, and reserves
- Monetary policy stance:
  - Further tightening may be necessary to ensure inflation returns to target (MEFP ¶20).
  - NBG intends to maintain its policy rate at 11 percent until a clear trend of decreasing inflation is seen.
  - If inflation expectations rise or demand pressures increase, NBG may maintain stance longer or undertake additional policy rate tightening, complemented by macroprudential measures (including to limit FX lending).
  - One-year-ahead inflation expectations remain around 5½ percent.
- Rationale and effects:
  - Further policy rate hikes would slow credit growth, reduce demand (many floating rate loans), affect expectations, and increase incentives to hold lari assets (potentially reducing deposit dollarization).
  - Macroprudential measures and tightening global financial conditions will limit switching to FX loans; share of FX loans is the lowest in a decade.
- Reserves and FX policy:
  - NBG committed to exchange rate flexibility and strengthening FX reserve coverage (MEFP ¶21-¶22).
  - With stronger-than-expected external inflows in 2022, NBG has undertaken substantial reserve purchases.
  - December 2022 NIR target raised from $840 million to $1.6 billion to lock in gains and build buffers.
  - GIR coverage in ARA metric: significantly higher than expected at program approval and moderately higher at end of program period.
  - To facilitate reserve build-up, authorities will phase out direct FX sales to SOEs during 2023.
- Communication and governance:
  - NBG committed to updating its communication strategy (December 2022 SB) including on FX reserve management and interventions, and to conduct regular impact assessments.
  - Authorities continue to consider modifications to the organizational and decision-making structure of the NBG with IMF TA support (MEFP ¶23).

### Financial sector resilience measures
- System-wide context:
  - Banking system weathered pandemic and war-in-Ukraine shocks well, supported by a robust regulatory and supervisory framework, but uncertainty and external risks remain high (¶27).
- Key actions:
  - Strengthening macroprudential framework with measures affecting consumer lending and FX reserve requirements, reducing risks from dollarization and slowing credit growth (¶27 and footnote 11).
  - Considering further strengthening capital buffer requirements and limiting FX lending risks for unhedged borrowers (MEFP ¶25).
  - Implementing financial sector conditionality: updated General Risk Assessment Program procedures (June 2022 SB), strengthened large exposure regulations, published climate-related financial sector risk assessment (December 2022 SB), and progress on corrective action framework and bank resolution (bridge bank playbook, March 2023 SB).
  - Strengthening AML/CFT framework and implementation, including sanctions risk management, automated sanction screening by NBG, and more rigorous supervision for banks and VASPs (MEFP ¶28-¶29).
  - Developing local capital markets: greater use of benchmark bonds; legislation on covered bonds, securitization, and dematerialized securities holdings; and corporate governance standards (MEFP ¶27).
- Specific 2022 macroprudential measures (footnote 11):
  - Recalibrated Currency Induced Credit Risk (CICR) buffer (effective January 1st).
  - Lowered maximum maturity of mortgage loans from 15 to 10 years (effective January 1st).
  - Increased income threshold for stricter PTI ratio from GEL 1000 to GEL 1500 (effective April 1st).
  - Introduced a 3 ppt interest rate shock in calculating PTI on floating rate loans (effective May 1st).
  - Reduced maximum term of consumer loans from 4 to 3 years (effective August 15th).
  - Set remuneration on banks’ required reserves to zero for USD (effective May 13th) and euro (effective September 15th) liabilities.

### Growth, inclusion, and social protection
- Labor and skills:
  - Ministry of Health and Labor to conduct a survey of labor and skills demand (June 2023 SB) to inform vocational training and teacher testing/training (MEFP ¶30).
  - Parliamentary and government reports on legislative gaps and potential active labor market policies, including integration of women into the labor market, due by end of year (MEFP ¶31).
- Social safety nets:
  - Improvements to Targeted Social Assistance by updating the proxy-means-testing formula and digitalizing the system to increase efficiency (MEFP ¶31).
- Governance and business environment:
  - Implemented insolvency law (MEFP ¶32); bill introduced to establish a National Anti-Corruption Bureau as part of EU candidate-status efforts.
  - Further reforms (e.g., judicial independence) would improve business environment and attract foreign investment.
- Infrastructure prioritization:
  - Need to prioritize a subset of infrastructure projects (roads, rail, ports, logistics, energy, undersea cable) given limited fiscal space to coordinate donors, evaluate feasibility, and assess fiscal risks (MEFP ¶33).

### Program modalities, conditionality changes, and financing
- Requested and supported modifications to program conditionality (¶32):
  - Raise end-December QPC floor on net international reserves from $840 million to $1.61 billion to lock in recent gains.
  - Raise end-December QPC ceiling on net budget lending from GEL 75 million to GEL 275 million for gas purchases by the Georgian Oil and Gas Corporation (GOGC).
  - Raise end-December indicative target on ceiling on primary current expenditure from GEL 14.2 billion to GEL 15 billion to accommodate supplementary budget spending.
  - Modify end-December SB target on audited stock of VAT declarations cleared for payments from no more than GEL 50 million to GEL 70 million.
  - Reset end-December SB on submitting a draft framework law for public corporations to end-September 2023 due to SOE strategy delay.
  - Reset end-September 2023 SB on developing a medium-term revenue strategy (MTRS) to end-March 2024.
  - Set QPCs for end-June 2023 and end-December 2023.
- Financing and repayment capacity (¶33):
  - Program fully financed with firm commitments for next 12 months and good prospects for full arrangement period.
  - Debt service to the IMF manageable.
  - If all drawings made and an adverse scenario materializes (Annex II), capacity to repay would remain adequate with obligations reaching 0.7 percent of GDP in 2027 (1.3 and 5.4 percent of exports and GIR) (Table 7).

### Safeguards assessment and program risks
- Safeguards (¶34):
  - Updated Safeguards Assessment of the NBG finalized in July found the safeguards framework generally strong and well aligned with leading practices on financial reporting, audit mechanisms, and controls.
  - Independent oversight by the Board constrained by an executive majority due to vacancies in non-executive positions; legal amendments necessary to address this gap.
  - NBG committed to addressing safeguards recommendations and has requested IMF TA (MEFP ¶35).
- Risks to program (¶35):
  - Risks manageable and mitigated by authorities’ track record of policy implementation.
  - Improved macroeconomic outlook reduces risks relative to program approval.
  - Political tensions and/or reform fatigue could undermine reform implementation; strong program ownership provides safeguards and mitigates these risks.

*Source: 1geoea2022004 - 16.      The authorities are committed to a 2023 fiscal deficit that complies with the fiscal rule*

### 36.      The Georgian economy has performed strongly in 2022 as adverse spillovers expected

### 36.      The Georgian economy has performed strongly in 2022 as adverse spillovers expected

### Macroeconomic performance and drivers
- Real GDP growth in 2022: 3.2 (actual 2022 figure in Table 1).
- Drivers of stronger-than-expected performance:
  - Buoyant tourism revenues.
  - A surge in war-related immigration and financial inflows.
  - A rise in transit trade through Georgia.
- Effects:
  - Lifted growth and fiscal revenues.
  - Strengthened the current account balance and the lari.
  - Supported reserve accumulation.
- Inflation developments:
  - Inflation remains elevated reflecting still high commodity prices and strong domestic demand.
  - CPI, Period average for 2022: 10.9.
  - CPI, End-of-period for 2022: 8.1.
  - Core CPI, End-of-period for 2021 reported as 5.9; core CPI for 2022 shown as "..." in Table 1 (not reported).

### Policy response and resilience-building
- Fiscal policy:
  - Authorities saved a portion of revenue windfalls, achieving a much lower fiscal deficit for 2022 than expected at program approval.
  - Draft 2023 budget would achieve a deficit of 2.8 percent of GDP, complying with the fiscal rule’s 3 percent of GDP deficit ceiling.
  - Medium-term plans seek to create further fiscal space.
- Monetary and reserve management:
  - The National Bank of Georgia (NBG) is using strong FX inflows to boost international reserve coverage and resilience.
  - GIR (Gross international reserves) in 2022 (Table 1): 3.3 (in billions of US$).
  - GIR as percent of ARA metric in 2022: 79.4.
  - Staff notes NBG’s commitment to exchange rate flexibility and readiness to further tighten policy if necessary.
- Program stance:
  - Authorities’ policy actions signal adherence to program goals: entrench macroeconomic stability, rebuild fiscal buffers, and reduce external vulnerabilities.
  - Authorities treat the program as precautionary and will only consider making purchases if the balance of payments deteriorates materially.

### Fiscal policy recommendations and revenue measures
- Recommendations to create fiscal space:
  - Save part of windfalls (already implemented).
  - Further action on revenue measures could create space for spending priorities.
  - Suggested measures:
    - Strengthen reporting of tax expenditures (ongoing).
    - Streamline tax expenditures.
    - Improve tax administration.
    - Develop a Medium-Term Revenue Strategy (MTRS).
  - Potential spending priorities to be financed:
    - Education reform.
    - Infrastructure investment.
    - Public Investment Management (PIM) reforms to prioritize high-return projects.

### Structural and sectoral reforms
- State-owned enterprises (SOE) and energy sector:
  - Adoption of an SOE governance reform strategy to promote operation on commercial principles, benefiting economic efficiency and limiting fiscal risks.
  - Renewable energy support scheme to meet energy demand in a climate-friendly way while guarding against fiscal risks.
- Structural reforms to support inclusive growth:
  - Survey of labor demand and skills and efforts to strengthen education and active labor market policies to reduce high unemployment and gender disparities.
  - Further strengthen the business environment.
  - Prioritize key infrastructure projects.
  - Continue to promote capital market development to catalyze private investment.

### Monetary policy and inflation outlook
- Policy framework:
  - Inflation targeting framework and floating exchange rate regime have served Georgia well.
- Near-term stance:
  - While inflation is expected to begin declining early in 2023, uncertainty and risks are high.
  - Additional policy rate tightening may be needed to bring inflation back to target.
  - Recent macroprudential measures supplement monetary policy tightening.

### Financial sector stability and recommended safeguards
- Current status:
  - Financial sector resilience strengthened by substantial efforts in past years.
  - NPLs and watch loans have continued to decline, reaching pre-pandemic levels (Figure notes).
  - Bank profitability remained robust owing to higher net interest and non-interest income compared to pre-pandemic levels (Figure notes).
- Recommended further steps:
  - Enhance the corrective action framework.
  - Strengthen bank resolution preparedness.
  - Bolster AML/CFT regulation and supervision.
  - Raise capital requirements.
  - Limit risks from FX lending for unhedged borrowers.

### External sector and balance of payments
- Current account and trade:
  - Current account balance (in billions of US$) for 2022: -2.4 (Table 1).
  - Current account balance (percent of GDP) for 2022: -10.9.
  - Trade balance (percent of GDP) for 2022: -20.3.
  - Net money transfers have risen dramatically, partially driven by outflows from Russia (Figure notes).
  - Goods trade balance deteriorated in 2022, reflecting higher imports (Figure notes).
- Capital flows and reserves:
  - GIR remained close to record highs as expected FX sales did not materialize, and the NBG was able to make purchases (Figure notes).
  - FDI and migration-related inflows more than offset a decline in disbursements by donors (Figure notes).
- Exchange rate and dollarization:
  - The lari has appreciated in both nominal and real effective terms above pre-war and pre-pandemic levels (Figure notes).
  - Deposit dollarization (percent of total) for 2022 in Table 1: 60.0.
  - Credit dollarization (percent of total) for 2022 in Table 1: 50.9.

### Key fiscal and macro-financial figures (selected, as reported)
- Real GDP: 3.2 (2022 actual).
- Nominal GDP (in billion of laris): 69.0 (2022 actual).
- Nominal GDP (in billion of U.S. dollars): 22.3 (2022 actual).
- GDP per capita (in thousand of U.S. dollars): 6.0 (2022 actual).
- Gross national saving (percent of GDP) 2022: 9.6.
- Investment (percent of GDP) 2022: 20.6.
  - Public investment (percent of GDP) 2022: 8.0.
  - Private investment (percent of GDP) 2022: 12.5.
- Revenue and grants (percent of GDP) 2022: 25.2.
  - o.w. Tax revenue (percent of GDP) 2022: 22.8.
- Expenditures (percent of GDP) 2022: 29.1.
- Augmented Net lending / borrowing (program definition) 2022: -4.0 (percent of GDP).
- General government debt 2022: 47.1 (percent of GDP).
  - Foreign-currency denominated (percent of total) 2022: 37.5.
- Gross international reserves (in billions of US$) 2022: 3.3.
- Gross external debt 2022: 85.8 (percent of GDP).
- Credit to the private sector (annual percent change) 2022: 20.9.
- Broad money (annual percent change) 2022: 19.9.

### Program assessment and staff view
- Given strong program performance, ownership, and renewed reform commitments, staff supports:
  - Request for modification of performance criteria and structural benchmarks.
  - Completion of the first review.
- Program treated as precautionary by authorities; purchases only if the balance of payments deteriorates materially.

*Source: Georgian authorities; and Fund staff estimates.*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### Conjunctural Risks — key risks, expected impacts, and policy responses
- Intensifying spillovers from Russia’s war in Ukraine
  - Likelihood: High
  - Expected Impact: Medium
    - Intensified war and sanctions could lower tourism, trade, remittances, and investments, while increasing depreciation pressures and inflation.
    - Sanctions may lead to AML/CFT and sanctions-related regulatory risks for financial institutions.
    - Upside: war-related capital and migrant inflows, and trade rerouted through Georgia, could boost demand and the external balance.
  - Policy Response:
    - Allow flexible exchange rate to act as a shock absorber.
    - Utilize foreign exchange reserves to prevent disorderly market conditions, drawing on SBA financing as needed.
    - Maintain tight monetary policy to keep inflation expectations anchored and avoid capital outflows.
    - Accelerate diversification of trade markets and routes.
    - Monitor financial institutions’ sanctions risk management and compliance.

- Commodity price shocks
  - Likelihood: High
  - Expected Impact: High
    - Rising global commodity prices would 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.
    - Draw on SBA financing should a larger fiscal response be necessary and to bolster foreign exchange reserves.

- Systemic social unrest
  - Likelihood: High
  - Expected Impact: High
    - Political polarization and social tensions could result in a disorderly lari depreciation and undermine policymakers’ ability to implement structural reforms.
    - Social tensions could threaten external financing flows from international financial institutions (IFIs).
  - Policy Response:
    - Improve communication about economic policy and set a medium-term reform agenda.
    - Maintain commitment and ownership of reforms.
    - Utilize foreign exchange reserves to prevent a disorderly depreciation.

- De-anchoring of inflation expectations and stagflation
  - Likelihood: Medium
  - Expected Impact: High
    - Supply shocks to food and energy prices could de-anchor inflation expectations and trigger a wage-price spiral, potentially leading to stagflation.
  - Policy Response:
    - Allow flexible exchange rate to act as a shock absorber.
    - Further tighten monetary policy, communicating strong commitment to inflation targeting.
    - Reprioritize spending to provide targeted fiscal support to the most vulnerable.

- Abrupt global slowdown or recession
  - Likelihood: High
  - Expected Impact: High
    - A global recession would lower tourism, trade, remittances, and investments, while increasing depreciation, inflation (stagflation), and fiscal and external pressures.
  - Policy Response:
    - Allow flexible exchange rate to act as a shock absorber.
    - Use existing policy space to support the economy and protect the most vulnerable, consistent with the inflation-targeting framework and fiscal sustainability.
    - Utilize foreign exchange reserves to prevent a disorderly depreciation.
    - Draw on SBA financing should a larger fiscal response be necessary and to bolster foreign exchange reserves.

- Local Covid-19 outbreaks
  - Likelihood: Medium
  - Expected Impact: Medium
    - Further lockdowns would negatively affect growth through lower tourism and investment, cause capital outflows, lead to lari depreciation and accelerating inflation, and increase poverty among the vulnerable.
  - Policy Response:
    - Allow exchange rate to adjust to new fundamentals.
    - Utilize foreign exchange reserves to prevent disorderly depreciation.
    - Further tighten monetary policy to keep inflation expectations anchored.
    - Reprioritize spending to meet health needs and provide targeted support to affected populations and businesses.

(Note: the RAM defines “low” as a probability below 10 percent, “medium” as between 10 and 30 percent, and “high” as between 30 and 50 percent.)

### Structural Risks — high-level impacts and responses
- Deepening geo-economic fragmentation and geopolitical tensions
  - Likelihood: High
  - Expected Impact: Medium
    - Accelerating de-globalization would challenge Georgia’s efforts to become a logistics hub and require finding new sources of growth less reliant on the external environment.
  - Policy Response:
    - Allow the exchange rate to adjust to reflect new fundamentals.
    - If inflation has fallen, utilize monetary policy space to ensure the output gap does not stay negative for too long.
    - Extend targeted measures to support individuals and businesses by reprioritizing spending.

### Georgia-specific structural risks — vulnerabilities and policy actions
- Financial risks
  - Likelihood: Medium
  - Expected Impact: Medium
    - Depreciation in a highly dollarized economy could hurt growth and threaten financial stability as households and firms struggle to repay loans; loan conversions could put 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 disorderly depreciation.
    - Strengthen the resolution framework to address financial stability challenges.
    - Allow use of capital and liquidity buffers to cope with shocks.
    - Adjust macroprudential measures to avoid undue tightening of financial conditions.
    - Enforce provisioning rules in line with international best practices.

- Fiscal risks
  - Likelihood: Medium
  - Expected Impact: High
    - Materialization of contingent liabilities/fiscal risks could put pressure on the deficit, complicate compliance with the fiscal rule, or result in lower capital or current spending.
  - Policy Response:
    - Continue improving SOE governance and fiscal risk management practices.
    - Strengthen revenue-raising capacity.
    - Strengthen reform agenda and seek IFI support.

- Political risks
  - Likelihood: Medium
  - Expected Impact: Medium
    - Political instability and/or reform fatigue could undermine structural reform efforts, increasing policy uncertainty and hurting growth.
  - Policy Response:
    - Maintain macroeconomic policy discipline.
    - Strengthen social safety nets to protect the most vulnerable and ensure inclusive growth.

### Annex II — Downside Scenario: shocks, magnitudes, and macro implications
- Scenario design: combined adverse shocks from (i) negative spillovers from the war in Ukraine, (ii) lower growth in major trading partners, and (iii) further increases in commodity prices; transmission through deteriorating terms of trade, lower tourism revenues, remittances, goods exports, and capital outflows.

- Assumed shock magnitudes and profiles:
  - Commodity prices: 10 percent higher in 2023 compared to the baseline, before gradually declining to baseline levels in 2025.
  - Remittances: net remittances 5 percent lower than the baseline in 2023, and 2.5 percent lower in 2024.
  - Services exports/tourism: tourism revenue 15 percent lower than the baseline in 2023, and 7.5 percent lower in 2024; implies tourism revenue falls to 3 percent below the 2019 level in 2023, before recovering back to the baseline by 2025.
  - Goods exports: merchandise exports 5 percent lower than the baseline in 2023, and 2.5 percent lower in 2024.
  - Capital outflows:
    - Nonresidents sell all their holdings of local government bonds: $130 million in 2023.
    - Nonresident deposits decline by 15 percent compared to the baseline in 2023, and 7.5 percent in 2024.

- Macroeconomic effects:
  - Growth: Lower exports, tourism, and remittances would hurt growth and deteriorate the growth outlook for 2024.
  - Exchange rate and inflation:
    - The lari would depreciate by 10 percent compared to the baseline in 2023.
    - Lari depreciation and higher commodity prices would add to inflation in 2023 and 2024 and delay inflation returning to target until end-2024.
  - External position and reserves:
    - Current account balance deteriorates by 3.7 percentage points of GDP in 2023 and 0.2 percentage points in 2024 relative to the baseline.
    - In the absence of additional external financing, the deterioration would be covered by reserves, which would fall to 66 percent of the ARA metric by 2024 (16 percentage points lower than the baseline in 2024).
  - Public finances and policy stance:
    - Authorities expected to maintain a tight monetary policy stance to contain inflationary pressures, allow the exchange rate to act as a shock absorber, and utilize reserves to prevent disorderly adjustment.
    - Government expected to prioritize targeted support to the vulnerable within the deficit limit of 3 percent of GDP, complying with the fiscal rule.
    - Drawing on the SBA would allow authorities to reach 75 percent of the ARA metric by the end of the program in 2025.
    - Past reserve adequacy after the 2015–16 regional shock ranged between 86–89 percent of the ARA metric.

*Prepared by Elif Ture (MCD). Source: Annex I. Risk Assessment Matrix and Annex II. Downside Scenario.*

### 5.      The attached MEFP updates the one from May 27, 2022 and documents our

### Attachment I. Memorandum of Economic and Financial Policies

### Recent Developments and the Outlook
- The memorandum covers developments since approval of the 36-month Stand-By-Arrangement (SBA) in June 2022 and outlines implemented and planned policies by the National Bank of Georgia (NBG) and the Government of Georgia to achieve program objectives.
- Growth and drivers:
  - Real GDP growth was 10 percent during January-October 2022, reflecting recovery of tourism, a rise in transit trade, and a surge in migration and financial inflows triggered by the war in Ukraine.
  - Growth is expected to moderate in 2023 and converge to potential rate of about 5 percent in the medium term, contingent on a more stable external environment with higher exports and tourism, and greater public and private investments.
  - Structural reforms required to achieve potential growth include strengthening SOE governance, reducing unemployment, promoting inclusion in the workforce, strengthening social safety nets, diversifying trade markets, and improving regional trade connectivity.
- Inflation and monetary stance:
  - Inflation was 10.4 percent y/y in November 2022 and is projected to close the year at 10.5 percent.
  - Inflation is expected to ease in 2023 to an average of 6 percent and converge to the NBG’s target level of 3 percent in 2024.
  - Drivers of easing include falling global commodity prices, dampened demand from slowing immigration and FX inflows, smaller fiscal deficits, and continued tight monetary policy. The NBG stands ready to increase the policy rate if inflation pressures persist.
- External and fiscal indicators:
  - The lari appreciated by over 13 percent in nominal effective terms since program approval.
  - Current account deficit is projected to narrow from 10.4 percent in 2021 to 5.6 percent in 2022.
  - Gross international reserves (GIR) reached US$4.4 billion (100 percent of the ARA metric) in October 2022 versus the program-approval year-end projection of US$3.3 billion (79 percent of the ARA metric).
  - Fiscal deficit through October 2022 was 0.9 percent of GDP, compared to 4 percent of GDP projected for 2022 at program approval.
- Risks:
  - Key risks include intensification of the war in Ukraine and sanctions on Russia, deterioration in global economic and financial conditions, reversal of migrant and financial inflows, commodity price, trade, and financial channels, and tightening global financial conditions.
  - Policy stance: commitment to exchange rate flexibility, sound macroeconomic and financial policies, and implementation of structural reforms as first line of defense.

### Program Performance
- Targets and achievements through end-June 2022:
  - Inflation consultation clause:
    - At 12.8 percent y/y in June 2022, headline inflation was within the inner bands of the inflation consultation target.
  - Quantitative performance criteria (QPCs):
    - Fiscal targets: general government cash deficit and net budget lending through June were GEL 172 million and GEL 18 million, respectively, well under program ceilings of GEL 1,370 million and GEL 30 million.
    - No new public guarantees issued; continuous QPCs on Partnership Fund operations met (a US$8 million surplus against a zero cash deficit QPC, and no new investment or new net borrowing).
    - Primary current expenditure through June was GEL 7,052 million, slightly above the indicative target ceiling of GEL 7,030 million.
    - External targets: Net international reserves (NIR) reached US$1,602 million as of end-June 2022, exceeding the program target by US$398 million.
  - Structural benchmarks (SBs) progress:
    - SOE governance:
      - Finalizing and adopting a public corporation reform strategy in agreement with IMF staff and in line with OECD principles, EU directives, and the Energy Community acquis (prior action).
      - Strategy envisages equal ownership of public corporations by the Ministry of Finance (MOF) and the Ministry of Economy and Sustainable Development (MOESD); will state that MOF and MOESD will equally share ownership of Georgia State Electrosystem (GSE) (prior action).
      - New independent council to oversee power generation SOEs with board members approved by Parliament; law to ensure MOF safeguards on investment, borrowing, and dividend policy and require regular financial reporting to the MOF.
      - Timebound plan to implement SOE reform strategy and pilot it in three major SOEs starting in the first quarter of 2023 (prior action). Three pilot SOEs: Georgian Railway, Georgian Gas Transportation Company, and United Airports of Georgia.
    - Renewable energy generation:
      - Developed a complementary support scheme for renewable power generation that limits fiscal risks (prior action); scheme envisages support for a maximum total power generation capacity of 1,500 MW to be awarded through auctions over the next three years, with an initial auction of 300 MW in 2022-2023.
      - Costs of the scheme will be passed on to final consumers; previously approved PPA projects not advancing materially will face a three-month assessment and potential termination.
    - Public investment management:
      - Updated PIMA in 2022 (end-March 2023 SB) and a Climate PIMA; noted significant improvement since 2018 and identified areas for further progress.
      - Submitted a budget code amendment to make all investments above a certain threshold subject to the PIM framework (end-September SB).
    - Tax policy and administration:
      - Submitted budget code amendment to authorize tax expenditure reporting and established schedule for annual tax expenditure reporting (end-September 2022 SB).
      - Automatically processed more than 90 percent of VAT credit claims (by number and value) within 30 calendar days and produced June 2022 statistics to monitor compliance (end-July 2022 SB).
    - Financial stability:
      - Developed and published updated internal procedures for the General Risk Assessment Program (GRAPE) (end June 2022 SB).
      - Published a report on Climate-related Risk Radar for Georgian Economic Sectors to assess climate-related financial sector risks (end-December 2022 SB).

### Economic Policy Agenda — A. Fiscal Policy
- Fiscal consolidation and fiscal rule:
  - Committed to the end-December 2022 augmented cash deficit of the general government below GEL 2,740 million (performance criterion) and expect to achieve a much lower deficit.
  - Indicative target: keep primary current spending below GEL 15 billion (revised up from GEL 14.2 billion).
  - Net budget lending target: below GEL 275 million (performance criterion—revised up from GEL 75 million to support GOGC operations).
  - Intend to eliminate quasi-fiscal activities by the GOGC with a significant reduction by mid-2023 to facilitate repayment of budget lending.
- 2023 budget and medium-term stance:
  - Submitted 2023 budget envisages total spending excluding interest payments of GEL 22 billion and revenues around GEL 21 billion.
  - This implies an augmented deficit of 2.8 percent of GDP—below the 3 percent of GDP ceiling in the fiscal rule—and a contractionary stance.
  - Any revenue windfalls will be saved to rebuild buffers, with possible limited targeted support for vulnerable groups; ready to adopt additional measures, including expenditure reductions, in consultation with IMF staff to meet the 2.8 percent of GDP augmented deficit.
  - Plan to reduce the augmented general government deficit from 2.8 percent of GDP in 2023 to 2.3 percent of GDP in 2024-2025 while expanding the general government perimeter to include state-owned enterprises classified as general government units (GG SOEs). Meeting 2024-2025 targets may require additional revenue measures.
- Debt and debt management:
  - Debt-to-GDP ratio reduced to below 40 percent as of September 2022.
  - Committed to keeping debt comfortably below the fiscal rule ceiling of 60 percent of GDP; project debt-to-GDP ratio to be stable in 2023-25.
  - Increase share of local currency-denominated debt from 25 percent in 2022 to 32 percent in 2025 to mitigate exchange rate risks and deepen local capital market.
- Revenue mobilization and tax administration:
  - Strengthening revenue administration and compliance risk management; expanding Large Taxpayer Office (LTO) operations.
  - Created a register of employees for tax administration purposes; expanding information-sharing with government agencies and the Financial Monitoring Service.
  - Legislation to implement Common Reporting Standards submitted to Parliament and signed the international agreement in November (expected parliamentary approval by end of year).
  - Published a first tax expenditure report (end-December 2022 SB) and will complete a tax expenditure review for VAT and income taxes including cost-benefit analysis (end-June 2023 SB).
  - Develop a medium-term revenue strategy (MTRS) with IMF TA by end-March 2024 (delayed from end-September 2023).
  - Plan to modernize the property tax system, introduce a more centralized valuation process, and consider taxing only properties above a certain threshold.
- VAT credits and refunds:
  - Committed to reducing audited stock of VAT declarations cleared for payments to no more than GEL 70 million (end-December 2022 SB—revised up from GEL 50 million).
  - Will continue to automatically process at least 90 percent of VAT credit claims (by number and value) within 30 calendar days and produce monthly statistics for July through December 2022 (end-January 2023 SB).
- Spending efficiency and transparency:
  - Considering spending reviews with IMF TA on select priority areas such as health, education, and agriculture.
  - Will publish 2022 consolidated financial statements for the central government based on IPSAS (end-June 2023 SB).
  - Begin transferring bank accounts of major GG SOEs to the Treasury account in 2023 to ensure GFS reporting timeliness and undertake a Fiscal Transparency Evaluation in the first half of 2023.
- SOE reform and governance framework:
  - Submit draft framework law for public corporations to Parliament by end-September 2023 (delayed from end-December 2022), consistent with IMF TA, EU directives, and Energy Community acquis.
  - Law will:
    - Establish that the primary objective of public corporations is to operate commercially.
    - Set criteria for establishing or retaining a public corporation.
    - Require SOEs to face the same regulatory and market conditions as private competitors and comply with a corporate governance code in line with international best practice.
    - Require publication of ownership policy statements and implementation of a comprehensive performance management framework.
    - Separate the ownership role of MOESD from its policy role and prohibit SOEs from engaging in implicit quasi-fiscal activities; require explicit government mandate for any QFAs.
    - From 2023, introduce a transparent mechanism to identify and compensate public corporations for public service obligations in line with the SOE law.

*Source: Memorandum of Economic and Financial Policies (Attachment I) from the MEFP update as provided.*

### 14. We are committed to further strengthening public investment management

### 14. We are committed to further strengthening public investment management

### Public investment management and fiscal safeguards
- No new investment projects over GEL 20 million will be included in the 2023 state budget law unless selected according to the PIM guidelines (end-December 2022 SB).
- An amendment to the budget code was submitted to Parliament to make all investments above a threshold subject to the PIM framework; the threshold will be identified with IMF TA in November and set through a government decree.

### Debt, arrears, and Partnership Fund limits
- Commitments to avoid arrears:
  - Will not accumulate any general government external debt payment arrears (continuous performance criterion).
  - Will not accumulate net domestic expenditure arrears of the general government (indicative target).
  - Will not issue new public guarantees (continuous performance criterion).
- Partnership Fund restrictions:
  - The Partnership Fund will not undertake any new investments or borrowing (continuous performance criteria).
  - The Partnership Fund will not run a deficit (performance criterion).
  - The Partnership Fund will not be involved in any way in government participation in private equity or venture capital investment funds.

### Fiscal risk monitoring and pensions
- Fiscal risks statement commitments:
  - Include in the 2022 Fiscal Risks Statement quantification of risks related to climate change and legal claims, and a long-term sustainability assessment for health and aging-related spending (end-December 2022 SB).
- Pension system consultations:
  - Amendments to the funded pension law (second pillar) and a proposed framework for voluntary private pensions (third pillar) were submitted to Parliament with ADB support.
  - Before amendments are adopted, IMF staff will be consulted on draft changes to the pension system.
  - Amendments to the funded pension law include improvements to institutional arrangements and diversification of the Pension Fund’s investment portfolio.

### Governance for SME support and equity participation
- If exploring minority government participation in private equity or venture capital funds focused on SMEs, commitments include:
  - Consultation with IMF staff.
  - Preferably alongside international financial institution co-investors.
  - Based on OECD corporate governance principles, with an exit strategy and a specific time horizon for investment.
  - Legislative amendments to ensure the government is a minority shareholder and not involved in selecting investment recipients.
- Government restrictions:
  - Apart from possible minority participation in a private fund as described above, the government will refrain from taking new equity stakes in private Georgian businesses or from establishing any institution that would seek to take such equity stakes.

### Monetary policy framework and reserves
- Inflation targeting and outlook:
  - Monetary policy decisions will continue to depend on the inflation outlook.
  - Inflation is projected to decline to an average of 6 percent in 2023 and 3 percent in 2024, aided by falling global commodity prices, smaller fiscal deficits, and continued tight monetary policy.
  - The authorities stand ready to tighten policy rates further and use other measures as needed to counter risks.
- Exchange rate and reserves:
  - Commitment to exchange rate flexibility while preventing disorderly market conditions.
  - Will continue to meet targets on net international reserves (NIR) and use reserves only to avoid disorderly market conditions.
  - Phase out in 2023 FX sales to public corporations through the Treasury as pandemic effects subside.
  - GIR to the IMF reserve adequacy metric (ARA) is expected to reach about 99 percent by end-2022.
  - GIR to ARA is projected to decrease by about 17 percentage points from end-2022 to end-2024.
  - Reserve coverage is expected to improve gradually and reach about 113 percent of the ARA metric by 2027.
  - Commitment to rebuild external buffers faster, consistent with exchange rate flexibility, if market conditions allow.
  - Update the NBG communication strategy, specifying objectives and introducing regular impact assessments (end-December 2022 SB), including strengthening communications about FX reserve management and intervention.

### Monetary governance review
- Review will cover decision-making, oversight, transparency, internal controls, and accountability for key monetary and financial sector policies.
- Assess advantages of collegial versus presidential decision-making practices for monetary and financial sector policies.
- Continue to consult with Fund staff before suggesting changes to the Organic Law on the NBG.

### Financial sector stability and supervision
- Banking system status:
  - Liquidity is substantial, capital buffers are adequate, profitability is high, and NPLs have declined, though restructured loans remain steadier in construction, hotel, and restaurant sectors.
  - A portion of restructured loans are being repaid and will be reclassified as performing over time.
- Monitoring and corrective actions:
  - Continue to monitor NPLs and restructured loans; ensure prompt provisioning and timely write-downs in case of significant deterioration.
  - Develop policy guidance (end-December 2022 SB) to strengthen the corrective action framework, ensuring timely action including initiation of license revocation or alternative failure resolution.
- Recovery and resolution framework improvements:
  - Build capacity at the NBG’s Resolution Authority by developing a playbook to make the bridge bank tool operational (end-March 2023 SB).
  - Finalize decisions regarding resolution funding arrangements.
  - Playbook to address establishment, governance, capitalization and financing, operation, and eventual sale of the bridge bank.
  - Strengthen inter-agency resolution coordination and communication domestically and cross-border as necessary.
- Systemic risk mitigation and macroprudential measures:
  - Since program approval, temporarily reduced the maximum maturity for unsecured consumer loans from 4 to 3 years.
  - Published draft instructions on connected borrowers to limit concentration risks.
  - Intended measures going forward:
    - Require banks to build up additional capital buffers.
    - Further refine climate-related data collection and analysis for both physical and transition risks.
    - Implement additional measures to reduce risks related to FX loans to protect unhedged borrowers.
    - Gradually restrict the use of informal income to calculate the payment-to-income ratio for retail borrowers.
    - Enhance disclosure of effective rates on financial products and promote product comparison websites to increase competition and protect consumers.

### Supervisory governance and capital markets development
- Supervisory governance enhancements:
  - Clarify roles and responsibilities of NBG structural units and committees by developing clear delegations of authority from the Vice-Governor responsible for financial supervision in line with IMF TA recommendations.
  - Review the charter and operations of the Financial Sector Supervision Committee to clarify its role in the supervisory process in line with FSAP recommendations.
  - Formalize the supervisory policy development process, ensuring a more structured process for public consultations regarding new legislation.
- Capital markets development:
  - Government adopted the capital market development strategy for 2022-2028 focusing on development of capital market instruments and deepening the investor base.
  - Submitted draft laws on covered bonds and securitization in 2022 to broaden market instruments.
  - Developed and adopted corporate governance standards for public companies with World Bank assistance.
  - Drafted the law on dematerialized securities holdings with IMF legal department to allow centralized issuance of public securities with a central securities depository (CSD) and improve investor protection.
  - Expanded the primary dealers program with new benchmarks and enhanced compliance monitoring tools.

### AML/CFT and virtual assets
- AML/CFT enhancements:
  - In February 2022 instructed financial institutions to adhere to financial sanctions by the US, the EU, and the UK.
  - In June 2022 created a specialized sanctions unit under the AML Supervision Department of the NBG and are seeking technical assistance from foreign authorities.
  - Requested and now receive additional monthly reports from commercial banks and payment service providers about customers connected to Russia, Belarus, and other risk-bearing countries.
  - Measures to reduce sanctions evasion risks: restricted banks’ ability to send cash to jurisdictions other than the US, the EU and the UK; increased the USD cash withdrawal fee for banks; imposed transaction limits on remittances.
  - Work to further automate sanctions screening and develop a comprehensive AML/CFT risk prevention framework.
- Virtual Asset Service Providers (VASPs):
  - Will start supervising VASPs from January 2023 and subject VASPs to rigorous AML/CFT standards.
  - VASP framework includes licensing/registration and revocation, fit and proper requirements for owners and management, AML/CFT supervision, information requirements for transfers of virtual assets, issuance of written instructions, additional requirements and restrictions, and imposition of sanctions.

### Structural reforms and social policies
- Labor market and education:
  - Periodic labor demand and skills survey established; latest survey results expected by June 2023 (end-June 2023 SB).
  - Findings to inform strengthening of vocational, education, and training (VET) programs in line with the 2019-2023 National Strategy for Labor and Employment Policy.
  - Introduced the Public Employment Works Program in March 2022 to support transition of those receiving targeted social assistance (TSA) into formal employment.
  - Commitment to improve quality and cost-effectiveness of education including strengthening testing and training of teachers.
- Social protection and TSA:
  - Aim to strengthen targeting of the TSA by improving the means testing methodology; currently running a pilot supported by the World Bank.
  - Working on digitalizing the TSA to accelerate application, selection, and disbursement processes.
  - Target to reduce time from application for TSA to disbursement from four months to one month.
  - Gender equality committees to report on legislative gaps and active labor market policies to support economic empowerment of women.
- Business environment, insolvency, and trade:
  - Introduced a bill to establish a National Anti-Corruption Bureau.
  - Operationalization of the new insolvency law continues with training and licensing of insolvency practitioners: as of end-October 2022, 18 insolvency practitioners have been authorized.
  - Since operationalization of the insolvency law, 25 insolvency cases have been opened: 12 bankruptcy proceedings and 13 rehabilitation motions.
  - Deepening trade relations and regional connectivity:
    - Ongoing negotiations with the UAE for a Comprehensive Economic Partnership Agreement.
    - In September, Georgia and Turkey deepened their FTA, further liberalizing tariffs on agricultural products and expanding trade in services.
    - Ongoing discussions to launch FTA negotiations with Republic of Korea, Israel, India and some GCC countries.
  - Infrastructure and logistics:
    - Advancing core infrastructure investments, including major highway corridors and railway modernization.
    - Announce a new selection process for developing the Anaklia Sea Port and start a feasibility study on ferry and feeder services between Georgia, Romania, Bulgaria, Ukraine, and Turkey (supported by the EU).
    - Considering further infrastructure projects including a submarine Black Sea cable; a feasibility study is being conducted.

### Program monitoring and safeguards
- Program monitoring tools:
  - The program will be monitored through quantitative performance criteria, indicative targets, an inflation consultation clause, and structural benchmarks.
  - Inflation consultation clause targets and bands are shown in Table 1; quantitative performance criteria and indicative targets for end-December 2022, end-June 2023, and end-December 2023 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) is attached to describe definitions of the inflation consultation clause and QPCs as well as data provision requirements.

*Source: 1geoea2022004 - 14. We are committed to further strengthening public investment management*

### 35. The NBG continues to maintain a strong safeguard framework and internal

### 1geoea2022004 - 35. The NBG continues to maintain a strong safeguard framework and internal

### Safeguards and governance
- The IMF Safeguards Assessment update completed in July found the safeguards framework of the NBG "generally strong and well aligned with leading practice, including on financial reporting, audit mechanisms, and controls over key operations."
- Planned actions with IMF TA:
  - Introduce legal amendments to the NBG governance framework to ensure a non-executive majority and independent oversight by the board.
  - Coordinate with relevant parties to expedite the appointment of a non-executive board member.
- Audit practice:
  - "As required by the safeguard policy, we continue to engage independent external audit firms to conduct audits of the NBG in accordance with international standards."

### Quantitative performance criteria and indicative targets (selected items from Table 2)
- Monitoring convention: targets are cumulative from the beginning of the calendar year, millions of GEL unless indicated otherwise.
- Performance criteria and selected reported/target figures (as presented):
  - Ceiling on the augmented cash deficit of the general government (program definition): 1,370; 172; Met.; 2,740; 2,740; 1,175; 2,350.
  - Ceiling on general government net budget lending: 30; 18; Met.; 75; 275; 1,000; 0.
  - Floor on NIR of NBG 1/ (end-period stock, million of U.S. dollars): 1,204; 1,602; Met.; 840; 1,610; 1,410; 1,310.
  - Ceiling on the accumulation of external debt arrears of the general government (continuous criterion) (million of U.S. dollars): 0; 0; Met.; 0; 0; 0; 0.
  - Ceiling on new public guarantees (continuous criterion): 0; 0; Met.; 0; 0; 0; 0.
  - Ceiling on the cash deficit of the Partnership Fund (million of U.S. dollars): 0; -8; Met.; 0; 0; 0; 0.
  - Indicative target — Ceiling on primary current expenditures of the general government: 7,030; 7,052; Not met.; 14,210; 15,000; 8,250; 16,500.
- Note on NIR target: "The NIR target is proposed using a constant USD/EUR exchange rate on March 15, 2022 (1.09875)."

### Inflation consultation clause (Table 1 — CPI bands and central points)
- Test-date definition: year-on-year percentage change of the monthly CPI in the month of the test date as measured and published by GEOSTAT.
- Central points and bands (in percent) by test date (as presented):
  - End June 2022 — Central point: 11.8; Inner band, upper limit/lower limit: 13.8 / 9.8; Outer band, upper limit/lower limit: 14.8 / 8.8.
  - End Dec. 2022 — Central point: 8.1; Inner band: 12.8; 10.1 / 6.1; Outer band: 11.1 / 5.1.
  - End June 2023 — Central point: 6.2; Inner band, upper/lower: 10.1 / 6.1; Outer band, upper/lower: 9.2 / 3.2.
  - End Dec. 2023 — Central point: 3.8; Inner band, upper/lower: 8.2 / 4.2; Outer band, upper/lower: 6.8 / 0.8.
  - Additional inner/outer band entries in the table: 5.8 / 1.8 (inner); note: table presents multiple columns for targets and actuals consistent with program schedule.

### Prior actions and structural benchmarks (selected items and statuses as of End-November 2022)
- Fiscal / Fiscal Risks:
  - Finalize and adopt public corporation reform strategy in consultation with the IMF staff and in line with OECD principles — Prior Action — Not met.
  - Determine the ultimate ownership of Georgian State Electrosystem — Prior Action — Not met.
  - Issue a timebound plan for implementation of the SOE reform strategy, including to pilot it in three major SOEs starting in Q1 2023 (to be selected with IMF staff) — Prior Action — Not met.
- Public Financial Management:
  - Develop a complementary support scheme for renewable power generation that limits fiscal risks in consultation with IMF staff — Prior action — Met.
  - Submit budget code amendments to authorize requirement for tax expenditure reporting and establish schedule for annual tax expenditure reporting — End-September 2022 — Met.
  - Publish first tax expenditure report including nature and costs — End-December 2022.
  - Complete a tax expenditure review for VAT and income taxes including cost-benefit analysis for key tax expenditure items — End-June 2023.
  - Develop a medium-term revenue strategy supported by IMF TA — End-March 2024.
  - Submit to Parliament an amendment to the budget code to make all investments above a threshold subject to the PIM framework — End-September 2022 — Met.
  - Require all investment projects over GEL 20 million in the 2023 state budget law to be selected according to PIM guidelines — End-December 2022.
  - Undertake an updated Public Investment Management Assessment (supported by IMF TA) — End-March 2023 — Met.
  - Publish the consolidated central government financial statements for 2022 based on IPSAS standard — End-June 2023.
- Tax Administration:
  - Automatically process (refund, offset, or permanently disallow) at least 90 percent of VAT credit claims (measured as both number and value of declarations) within 30 calendar days and produce monthly statistics — End-July 2022 — Met.
  - Reduce the audited stock of VAT declarations cleared for payments to no more than GEL 70 million — End-December 2022.
  - Automatically process (refund or offset) at least 90 percent of VAT credit claims within 30 calendar days and produce monthly statistics (for July through December 2022) — End-January 2023.
- Monetary Policy and Financial Sector:
  - Update NBG communication strategy including specifying objectives and introducing regular impact assessments — End-December 2022.
  - Develop policy guidance on corrective action framework for banks — End-December 2022.
  - Enhance governance of key internal processes for supervisory operations and decisions in line with FSAP recommendations — End-June 2022 — Met.
  - Develop a playbook to make the bridge bank tool operational — End-March 2023.
  - Publish an assessment of climate-related financial sector risks — End-December 2022 — Met.
- Structural Reform:
  - Conduct a labor market survey to monitor labor demand and skills needs — End-June 2023 — Prior Action.

### Technical Memorandum of Understanding (TMU) — program definitions, exchange rates, reporting, and adjustors
- Program exchange rates (Table 1, 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
- Valuation rule: "All foreign currency denominated assets will be valued in lari at program exchange rates as specified below. Amounts denominated in currencies other than the U.S. dollar will be converted for program purposes into U.S. dollar amounts using the cross-rates as of March 15, 2022."
- Institutional definitions:
  - General government comprises central government and local governments, excluding Legal Entities of Public Law; includes new funds or special budgetary/extrabudgetary entities created during the program period carrying out operations of a fiscal nature as defined in GFSM 2001.
  - General government coverage 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.
- Reporting requirements (selected):
  - Treasury Department to provide monthly detailed information on general government revenues within two weeks of the end of each month and monthly expenditures and arrears of the central government within four weeks.
  - Ministry of Finance to provide stock of general government debt, broken down by currency and original maturity, within one month from the end of each quarter.
  - Treasury to provide daily cash balances in all general government accounts as of the end of the previous business day.
  - Additional supporting data items and frequencies are specified for domestic bank/nonbank financing, external project financing, receipts from sales of non-financial and financial assets, securitized debt sold by the NBG, and VAT processing statistics (see TMU provisions).
- Adjustors for fiscal targets:
  - The ceiling on the augmented cash deficit will be adjusted downward by cumulative receipts from sale of non-financial assets above program amounts (Table 2).
  - The ceiling on net budget lending will be adjusted upward/downward by cumulative on-lent amounts from foreign-financed project loan disbursements above/below program amounts (Table 2).
- Projected financing for cash deficit of the general government (Table 2, in millions of GEL, cumulative from the beginning of the calendar year):
  - Receipts from sale of non-financial assets: Dec. 31, 2022 — 450; Jun. 30, 2023 — 150; Dec. 31, 2023 — 350.
  - On-lent amounts from project loan disbursements: Dec. 31, 2022 — 200; Jun. 30, 2023 — 120; Dec. 31, 2023 — 335.
- Definitions and monitoring:
  - Augmented cash balance/deficit and net budget lending defined consistent with GFSM 2001; augmented cash balance measured from financing side at current exchange rates established by the NBG at the date of the transaction.
  - Primary current expenditures defined as expenses (GFSM 2001) on a cash basis, minus interest payments.
  - Continuous performance criterion on accumulation of external debt arrears: applies to overdue debt service obligations of central government, NBG, or agency acting on behalf of general government; exceptions include creditor-agreed moratoria and payments into escrow pending renegotiation.
  - Continuous indicative target on accumulation of general government domestic expenditure arrears: "Domestic expenditure arrears are defined as non-disputed (in or out of court) payment obligations whose execution term has expired and become overdue... arrears will arise from non-debt liabilities that are not paid after 60 days of the contractual payment date... Any wage, pension or other entitlement obligation... not paid after a 30-day period... is in arrears."

*Source: IMF staff estimates*

### 21.      Supporting Material: The accounting of new domestic expenditure arrears (if any) will

### 1geoea2022004 - 21.      Supporting Material: The accounting of new domestic expenditure arrears (if any) will

### Domestic expenditure arrears
- Supporting material requirement: The 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 requirement: 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 — Ceiling on the Cash Deficit
- Definition: The cash deficit of the Partnership Fund will be measured as its expenditures minus its revenues.
- Composition of revenues:
  - Dividends from its assets and investments.
  - Interest earnings from the loans it provides.
  - Fees charged for services and guarantees it provides.
  - Any other income earned from its assets.
- Composition of expenditures:
  - All current and capital expenditures.
  - Current expenditures comprise compensation of employees, the purchase of goods and services, transfers to other entities, other account payables and domestic and external interest payments.
  - Capital expenditures comprise the net acquisition of nonfinancial assets as defined under GFSM 2001.
  - The Partnership Fund’s purchase of financial assets (e.g., lending and equity participation) will not be considered part of its expenditures.

### Continuous ceiling on New Net Borrowing by the Partnership Fund
- Definition: Net borrowing by the Partnership Fund is defined as contracted debt liabilities minus principal repayments.
- Supporting material requirement: The Ministry of Finance will provide to the IMF 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 by the Partnership Fund are defined as gross acquisition of non-financial and financial assets, excluding (i) currency and deposits and (ii) other accounts receivables. Further excluded are transactions which are unambiguously required by contractual obligations established before November 1, 2019.
- Supporting material requirement:
  - The Ministry of Finance will provide to the IMF 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 on the NIR of the NBG
- Definition (NIR in U.S. dollars): Foreign assets of the NBG minus the sum of foreign liabilities of the NBG, including all of Georgia’s liabilities to the IMF (excluding the SDR allocations).
  - Foreign assets of the NBG include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and the reserve position in the IMF.
  - Gross foreign exchange reserves are defined as liquid, convertible currency claims of the NBG on nonresidents, including cash holdings of foreign exchange that are readily available.
  - Pledged or otherwise encumbered assets, including assets used as collateral (or guarantee for third party external liabilities), are excluded from foreign assets.
  - Foreign liabilities of the NBG are defined as the 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, the stock of foreign assets and foreign liabilities of the NBG shall be valued at program exchange rates as described in paragraph 2 above.
- Stock of NIR: The stock of NIR amounted to $1,602 million as of June 30, 2022 (at program exchange rates).

### NIR adjustors (program purposes)
- Floor on NIR will be adjusted:
  - Upward (downward) by any excess (shortfall) of privatization revenue in foreign exchange above (below) the programmed amounts (Table 3).
  - Upward (downward) by any excess (shortfall) of budget support grants compared to program amounts (Table 3).
  - Downward by any shortfall of budget support loans compared to program amounts (Table 3).
  - Upward by the sum of the total excess of budget support loans compared to program amounts (Table 3) and any negative net Eurobond issuance by the government, if this sum is positive.
  - Upward by any positive net Eurobond issuance by the government.
  - Upward/downward by 100 percent for any excess/shortfall related to disbursements of the project loans and grants to the treasury single account at the NBG relative to the projected amounts (Table 3).

### Table 3 — Projected Balance of Payment Support Financing (Millions of U.S. dollars)
- Dec. 31, 2022 (Cumulative from January 1, 2022):
  - Projected privatization revenue: 0.0
  - Budget support grants from external donors and not related to project financing: 19.7
  - Budget support loans, including bilateral and multilateral donors for budget support: 238.4
  - Project loans and grants: 241.8
- Jun. 30, 2023 (Cumulative from January 1, 2023):
  - Projected privatization revenue: 0.0
  - Budget support grants from external donors and not related to project financing: 0.0
  - Budget support loans, including bilateral and multilateral donors for budget support: 0.0
  - Project loans and grants: 96.6
- Dec. 31, 2023 (Cumulative from January 1, 2023):
  - Projected privatization revenue: 0.0
  - Budget support grants from external donors and not related to project financing: 35.8
  - Budget support loans, including bilateral and multilateral donors for budget support: 109.0
  - Project loans and grants: 285.4
- Note: Flows are valued at program exchange rates for all targets.

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

### Statement by the Staff Representative on Georgia — December 21, 2022 (key updates)
- Prior actions on SOE governance reform have been met; adoption on December 14, 2022 of government decree number 573, including SOE reform strategy, timebound implementation plan, and action plan to pilot in three major SOEs in 2023.
- Final SOE reform strategy includes:
  - Introduction of corporate governance standards for SOEs (each SOE to have a qualified, independent board).
  - Operation of SOEs under commercial principles and competitive neutrality.
  - Clarification of state ownership goals and rationales under the dual ownership model (equal ownership of the Ministry of Finance and the Ministry of Economy and Sustainable Development, with an exception for power generation companies).
  - Strategic management of SOEs in line with statements of corporate intent to be submitted to shareholders annually.
  - Implementation plans and a framework law on SOEs (end-September 2023 SB).

- 2023 budget approval: Georgian Parliament approved the 2023 budget on December 15, 2022. The approved budget is in line with program commitments with an augmented deficit target of 2.8 percent of GDP, below the 3 percent of GDP fiscal rule ceiling.

### Statement by Mr. Rashkovan and Mr. Tsur on Georgia — December 21, 2022 (authorities’ view and macro outcomes)
- Growth and labor market:
  - Estimated real GDP growth rate: 10 percent YoY during January-October 2022.
  - Employment increase in the business sector: 6.7 percent since the beginning of the year (mainly wholesale and retail trade and information and communication industry).
  - Unemployment: 18.1 percent in Q2 to 15.6 percent in Q3.

- External sector and current account:
  - Larger imports offset by tourism revenues and remittances, resulting in an improved current account.

- Monetary policy and inflation:
  - NBG increased the policy rate by a cumulative 250 basis points in 2021 and 50 basis points in 2022 to 11%, keeping the real policy rate positive.
  - Inflation readings: 11.5 percent in September, 10.6 in October, and 10.4 in November.
  - NBG expects inflation to approach the target level in the second half of 2023.
  - Credit growth has begun to slow; NBG expects credit growth to slow further with monetary policy tightening from the European Central Bank and the Federal Reserve.
  - Measures taken on responsible lending: recalibrated requirements on maximum maturity of consumer and FX mortgage loans, payment-to-income ratio and borrower’s creditworthiness for floating interest rate loans.

- Fiscal policy and public debt:
  - Fiscal rule requires bringing the deficit below 3 percent of GDP by end-2023; government might achieve this target already this year.
  - Projected deficit: 3.1%, after a 4% projection six months ago.
  - Debt-to-GDP: peaked at 60 percent in 2020, reduced to 49.7 percent in 2021 and is now expected to get very close to the pre-pandemic level of 40% by the end of this year.
  - NBG used external inflows to purchase international reserves; staff now projects ARA metric level at 98.6 percent, higher than the 79.4 percent projected at SBA approval.

- Financial sector resilience:
  - Banking sector continued to provide smooth lending.
  - In 2022, banking sector asset quality, profitability, and capital and liquidity ratios improved, allowing banks to restore capital buffers earlier than the date set by the NBG.
  - Financial Stability Committee decided to revise the framework for setting a countercyclical capital buffer following the Basel Committee recommendation.

- Sanctions compliance:
  - NBG mandates all supervised entities comply with the sanctions of the US, EU, and UK since they were imposed in February 2022.
  - Enhanced sanctions monitoring; creation of a specialized sanctions unit under the AML Supervision Department in June 2022.
  - Monthly reports required from commercial banks and other financial institutions about customers connected to Russia, Belarus, and other risk-bearing countries.

- SOE reform and energy policy:
  - SOE reform is a key element of the SBA program; decree ensures clear separation between state shareholding and policymaking functions and includes pilot reforms in three major SOEs starting Q1 2023.
  - Government decision to gradually increase local generation capacities and a complementary support scheme for renewable power generation:
    - Two key principles to limit fiscal risks: base the renewable energy support scheme on competition and market principles, and pass the costs of the scheme on to final consumers.

- Structural reform priorities and infrastructure:
  - Authorities will continue strengthening SOE governance, promote inclusion in the workforce, strengthen social safety nets.
  - Ambition to develop Georgia as a regional data exchange hub and a reliable connectivity corridor.
  - Infrastructure projects under consideration include improving roads (East-West Corridor highway set to be completed in 2023) and a potential submarine Black Sea cable to enhance digital and power connectivity.
  - Continued cooperation with partners including the World Bank, the EBRD, the ADB, the US, and the EU.

*Source: 1geoea2022004 - 21.      Supporting Material: The accounting of new domestic expenditure arrears (if any) will*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1geoea2022004.pdf_