## 1geoea2024001 ## Source details **Canonical URL:** [1geoea2024001](https://www.imf.org/-/media/files/publications/cr/2024/english/1geoea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1geoea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1geoea2024001.pdf.json) --- ### Executive summary — context and recent background - Georgia’s economic performance: growth moderated from double digits but "remains high", inflation "is low", and fiscal and financial buffers "are healthy". - EU candidate status earned in December 2023; parliamentary elections expected in October 2024. - SBA reviews on hold since June 2023 due to NBG governance and stalled SOE reform: - June 2023 amendments created a new First Deputy and Acting Governor position, superseding existing succession framework, contradicting IMF Safeguards recommendations. - September 2023 revision of NBG regulation on banks’ compliance with international sanctions introduced regulatory ambiguity. - SOE reform strategy based on a centralized dual ownership model by the Ministries of Finance and Economy has not moved forward as envisaged under the SBA. ### Recent economic developments (key statistics) - Growth and demand: - Real GDP growth: 7.5 percent (y/y) in 2023; rapid estimate averaged 7.7 percent (y/y) during January-February 2024. - Private sector credit: bank credit to the private sector grew by 16 percent (y/y, at constant exchange rates) in January-February 2024. - External sector and reserves: - Current account deficit: 4.3 percent of GDP in 2023. - Gross international reserves: $5 billion at end-2023 (95 percent of the ARA metric). - Inflation, labor market, and wages: - Headline inflation: 0.5 percent (y/y) in March 2024; core inflation: 2.4 percent (y/y). - Nominal wage growth: 15.3 percent (y/y). - Unemployment rate: 15.3 percent in Q4 2023. - Fiscal developments: - Augmented fiscal deficit in 2023: 2.5 percent of GDP (budgeted deficit: 2.8 percent). - 2024 budget target: 2.5 percent of GDP; deficit through March: 0.1 percent of GDP. - Banking and financial sector: - NPLs (IMF measure): 1.6 percent at end-February 2024. - Loan dollarization: around 45 percent. - FX lending floor for unhedged borrowers raised to GEL 400,000 effective May 2024 (plan to raise further gradually). ### Inflation and monetary policy (Box 1 highlights) - Recent path and drivers: - Inflation peaked at 13.9 percent in January 2022, fell to 0.5 percent (y/y) in March 2024; exchange rate appreciation estimated to have reduced inflation by 6 percentage points at its peak. - Monetary policy effectiveness and stance: - Staff estimate: 100 basis points of monetary tightening lowers inflation by 0.8 percentage points at peak (after 2 years); about half via exchange rate channel. - Policy rate: 8.25 percent in March 2024. - Neutral rate estimates: between 7.5 and 8.25 percent (staff). - Outlook and recommended approach: - Inflation projected to reach NBG’s 3 percent target in the second half of 2024 and exceed 4½ percent by mid-2025 before converging back to target. - Further rate cuts should be "gradual and cautious" given rising inflation risks and a positive output gap. ### Outlook and risks - Growth projection: - Staff expects growth to slow to 5.7 percent in 2024 and converge to around 5 percent in the medium term. - Current account and reserves: - Headline inflation expected to reach 4 percent by end-2024. - Current account deficit expected to widen to 5.8 percent of GDP in 2024 and stabilize around 5½ percent of GDP over the medium term. - Reserve coverage projected to remain below 100 percent of the ARA metric in 2024, improving to around 103 percent by 2028. - Key risks: - Downside: reversal of war-related migrant, FX, and tourism inflows; intensification of sanctions; sharp correction in real estate prices; loss of reform momentum around elections. - Upside: further war-related inflows; increased transit trade and investments, including from EU integration. - Mitigating factors: - Replenished fiscal and reserve buffers, abundant bank capital and FX liquidity, borrower-based macroprudential measures. ### Authorities’ views - Authorities broadly concur with staff on outlook and risks, expect growth to slow towards potential, and inflation to reach 3 percent during 2024. - Authorities view reversal risk of war-related inflows as lower and assign a lower probability to inflation exceeding the target by year-end. ### Key policy recommendations — fiscal and public finances - Fiscal stance: - "Modest further fiscal adjustment" appropriate in the medium term to build buffers under the fiscal rule and create room for productive spending. - Fiscal deficit guidance: range of 2–2.5 percent of GDP to stabilize public debt around 40 percent of GDP. - 2024 budget target of 2.5 percent of GDP judged appropriate and achievable; keeps deficit below the 3 percent fiscal rule ceiling. - Revenue and PIM: - Medium-term revenue strategy, streamline tax expenditures, expand large taxpayer office operations, and improve taxpayer audit capability and enterprise risk management. - Improve public investment management: select all new investment projects above GEL 20 million per updated PIM guidelines; develop digital PIM module; require competitive procurement for PPPs; include fiscal cost and risk assessments for large projects in Fiscal Risks Statements. - SOE fiscal risks: - SOE reform should limit fiscal risks and enhance efficiency in line with EU principles. - Non-market SOEs should be included in general government fiscal statistics. - Georgian Development Fund (GDF) must operate commercially and independently; forthcoming SOE law should apply to GDF and empower MoF for financial oversight. ### Monetary policy, reserves, and NBG governance - Policy stance: - Gradual and cautious further policy rate cuts; policy rate should remain primary instrument to meet inflation objectives. - With policy rate close to neutral, cuts should be data-driven and clearly communicated. - Exchange rate and reserves: - Continue exchange rate flexibility and opportunistic reserve accumulation; intervene only to avoid disorderly FX market conditions and refrain from defending the lari. - Governance recommendations: - Amend NBG law to ensure a non-executive majority on the oversight board; limit discretionary transfers to government; clarify and strengthen succession framework and board member qualification criteria. - Shift from presidential to collegial decision-making model is desirable. - Authorities’ stance: - Authorities estimate neutral rate at 6.5-7.5 percent; staff estimate 7.5-8.25 percent. - Authorities committed to flexible exchange rate and opportunistic FX purchases; limited room for governance reforms before year-end. ### Financial sector resilience and macroprudential policy - System-wide position: - Banking system: well capitalized, profitable, and liquid but highly concentrated and dollarized. - NPLs low; key indicators: NPLs around 1.6–1.9 percent (series), Capital to RWA around 19.5–22.4 percent (Dec series). - Macroprudential measures and de-dollarization: - Progressive increases in FX lending floor for unhedged borrowers: GEL 200,000 → GEL 300,000 (Jan 1, 2024) → GEL 400,000 (May 1, 2024); plan to increase further gradually. - CICR and other measures recalibrated; PTI and LTV rules differentiated by currency and residency. - PTI limits: monthly income < GEL 1000: PTI 20% for FX loans and 25% for GEL loans; monthly income > GEL 1000: PTI 30% for FX loans and 50% for GEL loans; income threshold increased to GEL 1500 on April 1, 2022. - LTV limits: 85% for GEL loans and 75% for FX loans. - Mortgage maturities: 20 years for GEL or fully hedged FX; 10 years for unhedged FX mortgages. - Macroprudential governance and recommendations: - Streamline toolkit, better inform calibrations via impact assessments, and avoid substituting macroprudential policy for monetary policy. - Maintain adequate loan loss reserves, liquidity, and capital buffers; NBG committed to cycle-neutral positive CCyB at 1 percent, phased at 0.25 percent increments annually to reach 1 percent by March 2027. - Establish framework for licensing and supervision of VASPs and digital banks with AML/CFT controls; progress required on FATF recommendations. ### Structural reforms to boost inclusive growth - Constraints: aging population; outward migration (population estimated to fall by 2.6 percent by 2030); low educational attainment; infrastructure bottlenecks; low agricultural productivity; limited competition. - Reform priorities: - Raise agricultural productivity via irrigation, land registration, and targeted support. - Improve education and vocational training; reduce disincentives to work while on targeted social assistance. - Increase access to finance for SMEs and promote competition in financial services. - Prioritize transport, logistics, and energy investments (East-West highway, Anaklia deepwater port, Black Sea cable) to reduce trade costs. - Bolster judicial system and anti-corruption authority; improve asset declaration coverage and verification to support competitiveness and EU accession. - Authorities’ initiatives: - Ambitious educational reforms; State Employment Support Agency aligning vocational curricula with private sector; National Agency of Public Registry completing land registration program. - Authorities desire to maintain public capital expenditure at 8 percent of GDP. ### Debt consolidation, DSA, and fiscal anchor - DSA summary: - Overall risk of sovereign stress: "Low". - Public debt: around 39.2 percent of GDP in 2023; projected to decline gradually to 33.4 percent by 2033 (selected baseline path). - Gross financing needs: remain manageable, generally below 5.7 percent of GDP in projections. - Debt stabilization: "Yes"; debt assessed "Sustainable with high probability". - Baseline public debt projections (selected years, percent of GDP): - 2023: 39.2 - 2024: 37.9 - 2025: 37.8 - 2026: 37.4 - 2029: 36.2 - 2033: 33.4 - Safe fiscal anchor analysis (Annex VI): - Current public debt about 39 percent of GDP is safe under baseline simulations. - Staff identifies a "safe" debt level of 43 percent of GDP linked to a roughly 5 percent probability of exceeding the 60 percent debt ceiling; prudent anchor around 40 percent of GDP recommended. - Safe deficit range consistent with a 40 percent debt anchor: 2–2.5 percent of GDP, adjusting for aging and climate pressures. - Simulation assumptions include potential growth of 5 percent, inflation at 3 percent target, average effective interest rate of 6 percent, and annual USD/GEL depreciation of 2 percent. ### External sector assessment and reserves - External position: - NIIP: -98.3 percent of GDP by end-2023; gross assets 52.9 percent; gross liabilities 151.2 percent; debt liabilities 54.5 percent. - Current account: -4.3 percent of GDP in 2023; 2024 projected at -5.8 percent of GDP; medium-term around -5.5 percent of GDP. - Reserves and ARA coverage: - GIR: $5,009.7 million end-2023 (16.4 percent of GDP); GIR coverage: 95.5 percent of the ARA metric in 2023. - If banks’ external assets cover non-resident deposits, adjusted GIR coverage increases to 115.2 percent (adjusted ARA metric). - Staff projects GIR coverage to remain nearly 95 percent of ARA in 2024 and improve to 103.0 percent by end-2028. - External debt outlook: - External debt baseline decline from 70.2 percent of GDP in 2023 to 49.4 percent by 2029. - Stress test: one-time real depreciation of 30 percent in 2024 would raise external debt-to-GDP to around 99 percent before declining to below 73 percent by 2029. ### Risk Assessment Matrix (Annex II) — salient risks and policy responses - Conjunctural high-likelihood risks: Intensification of regional conflict(s) (High); Commodity price volatility (High). - Notable policy responses across risks: - Allow flexible exchange rate to act as shock absorber. - Utilize foreign exchange reserves to prevent disorderly market conditions. - Maintain tight monetary policy to anchor inflation expectations. - Accelerate diversification of trade markets and routes. - Structural and country-specific risks: Deepening geo-economic fragmentation (High); Fiscal risks (Medium); Political risks (Medium). ### Data, governance, and Fund engagement - Data adequacy: Rating A; data provided are adequate for surveillance. - NBG governance and Safeguards: - NBG implemented most recommendations in the 2022 Safeguards Assessment; staff urges further strengthening of independence and succession framework. - SBA reviews paused since June 2023 due to governance concerns. - Fund engagement and capacity development: - IMF TA: Georgia benefited from 163 Fund TA missions over five years; 60 percent led by FAD. - Authorities remain committed to reforms under the precautionary SBA; political constraints may delay some governance and SOE supervision changes until after October elections. _Italic: Source: IMF staff report content from the provided PDF content unit (1geoea2024001)._ ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context and recent background - Georgia’s economic performance remains robust: growth moderated from double digits but "remains high", inflation "is low", and fiscal and financial buffers "are healthy". - EU candidate status earned in December 2023; parliamentary elections expected in October 2024. - Reviews under the SBA have been on hold since June 2023 reflecting concerns about NBG independence and stalled SOE governance reform: - Amendments to the NBG law in June 2023 created a new First Deputy and Acting Governor position, superseding the existing succession framework, contradicting IMF Safeguards recommendations. - Revision in September 2023 of the NBG regulation on banks’ compliance with international sanctions introduced regulatory ambiguity and potential financial sector risks. - Implementation of the SOE reform strategy based on a centralized dual ownership model by the Ministries of Finance and Economy has not moved forward as envisaged under the SBA. ### Recent economic developments - Growth and demand: - Real GDP growth was 7.5 percent (y/y) in 2023; the rapid estimate averaged 7.7 percent (y/y) during January-February 2024. - Growth in 2023 was driven largely by services and investments. - Private sector credit: bank credit to the private sector grew by 16 percent (y/y, at constant exchange rates) in January-February 2024. - External sector and reserves: - Current account deficit was 4.3 percent of GDP in 2023—a historical low. - Gross international reserves stood at $5 billion at end-2023 (95 percent of the ARA metric). - Financial inflows have moderated but remain above pre-war levels. - Inflation, labor market, and wages: - Headline inflation was 0.5 percent (y/y) in March 2024; core inflation was 2.4 percent (y/y). - Nominal wage growth was 15.3 percent (y/y). - Unemployment rate was 15.3 percent in Q4 2023—a historical low. - Fiscal developments: - The augmented fiscal deficit in 2023 was 2.5 percent of GDP, compared to a budgeted deficit of 2.8 percent. - The 2024 budget targets an unchanged fiscal deficit of 2.5 percent of GDP. - The deficit through March was 0.1 percent of GDP. - Banking and financial sector: - Banking system is well capitalized, profitable, and liquid but highly concentrated and dollarized. - Nonperforming loans (IMF measure) were 1.6 percent at end-February 2024. - Loan dollarization has declined to around 45 percent. - The floor on FX lending to unhedged borrowers was raised to GEL 400,000 effective from May 2024, with a plan to further raise it gradually. ### Inflation and monetary policy (Box 1 highlights) - Recent inflation path and drivers: - Inflation spiked in 2021-22 (peak of 13.9 percent in January 2022) and then fell to 0.5 percent (y/y) in March 2024, driven largely by exchange rate appreciation and falling commodity prices, alongside a tight monetary policy. - Staff estimates that exchange rate appreciation reduced inflation by 6 percentage points at its peak. - Monetary policy effectiveness and stance: - Staff estimates that 100 basis points of monetary policy tightening by the NBG decreases inflation by 0.8 percentage points at its peak (after 2 years); roughly half of this effect comes through the exchange rate channel. - The policy rate was 8.25 percent in March 2024. - Using two models, staff estimates the neutral rate in Georgia ranges between 7.5 and 8.25 percent. - Outlook and recommended approach: - Inflation is projected to reach NBG’s 3 percent target in the second half of 2024 and exceed 4½ percent by mid-2025, before converging back to target gradually. - Further rate cuts should be "gradual and cautious" to anchor inflation around its target, given rising inflation risks and a positive output gap. ### Outlook and risks - Growth projection: - Staff expects growth to slow to 5.7 percent in 2024 as war-related financial inflows continue to ease and capacity constraints start to bind. - Growth is expected to converge to a potential rate of around 5 percent in the medium term. - Drivers and composition: - Consumption is expected to play a larger role in 2024, supported by strong real wage growth and employment. - The negative credit gap is expected to close in 2024, with higher consumer and SME credit. - EU candidate status could send a positive signal for investments, but near-term economic benefits are expected to be limited. - Key risks include ongoing geopolitical uncertainties, shifting geo-economic patterns, capital inflows, virtual assets, sanctions-related issues, and domestic political polarization affecting reform implementation. ### Key policy recommendations - Fiscal policy and public finances: - "Modest further fiscal adjustment" is appropriate in the medium term to build sufficient buffers under the fiscal rule and create room for productive spending. - A medium-term revenue strategy and improved public investment management should underpin the adjustment. - SOE reform should seek to limit fiscal risks and enhance efficiency in line with EU principles. - Monetary policy and NBG governance: - Monetary policy normalization should proceed "gradually and cautiously" to ensure core inflation remains close to target. - Continued exchange rate flexibility, reserve buildup, and financial sector vigilance are essential to guard against risks, including from capital inflows, virtual assets, and sanctions. - Strengthening NBG governance and independence is essential to the credibility of monetary policy. - Financial sector resilience: - Maintain vigilance on bank concentration, dollarization, and unhedged borrower exposure; continue macroprudential measures as needed. - Progressive tightening of the FX lending floor for unhedged borrowers (GEL 400,000 effective May 2024 and planned further increases). - Structural reforms to boost inclusive growth: - Priorities include infrastructure investments to foster economic diversification and regional connectivity. - Improvements in education and training, and in agricultural productivity to address high unemployment and low rural labor force participation. - Judicial and anti-corruption reforms to improve competitiveness and the business environment. - EU accession and governance: - Make decisive progress on the nine priority reform areas identified by the EU—addressing political polarization, judicial reform, de-oligarchization, institutional independence, and media freedom—to move accession talks forward. *IMF mission discussions were held during March 6–19, 2024; this Executive Summary is dated April 29, 2024.* ### 10. Inflation is expected to converge to target and the current account deficit to stabilize ### 10. Inflation is expected to converge to target and the current account deficit to stabilize ### Outlook: inflation, current account, and reserves - Headline inflation is expected to reach 4 percent by the end of 2024, as the impact of lari appreciation dissipates and monetary policy eases, before converging to target over the medium term. - The current account deficit is expected to widen in 2024 to 5.8 percent of GDP, as exceptional remittances continue to normalize and the goods trade deficit picks up. - Over the medium term, the current account deficit should stabilize at around 5½ percent of GDP, as the services trade balance continues to improve. - Reserve coverage would remain below 100 percent of the ARA metric in 2024 amid a higher current account deficit, with a gradual improvement to around 103 percent by 2028. ### Risks to the outlook - Downside risks are prominent given uncertainty about war-related inflows and shifting geo-economic patterns: - Reversal of war-related migrant, FX, and tourism inflows. - Intensification of sanctions that affect Georgia and geo-economic fragmentation. - A sharp correction in real estate prices could diminish the quality of banks’ assets. - A loss of reform momentum in the context of this year’s parliamentary elections. - Potential impacts of an adverse scenario: - Dampened growth, weaker lari, higher inflation, and higher debt given the high FX share. - Upside risks: - Further war-related migrant and FX inflows. - Increased transit trade and investments due to shifting geo-economic patterns, including from further integration with the EU. - Mitigating factors: - Replenished fiscal and reserve buffers, abundant bank capital and FX liquidity, and borrower-based macroprudential measures (Annex VII). ### Authorities’ views on outlook and risks - Authorities broadly concur with staff on the economic outlook and risks. - They expect growth to slow towards potential and inflation to reach the 3 percent target during 2024 as favorable external factors dissipate and monetary policy normalizes. - Authorities view the risk of a reversal of war-related migrant and financial inflows as lower and assign a lower probability to inflation exceeding the target by the end of the year. ### Fiscal policy: building fiscal space and managing fiscal risks - The 2024 budget target of 2.5 percent of GDP is judged appropriate and achievable. - The target would keep the deficit below the 3 percent of GDP fiscal rule deficit ceiling and help stabilize public debt at current levels, comfortably below the fiscal rule ceiling of 60 percent of GDP. - Revenue expectations and recent measures: - Increased revenues from changes in the CIT regime for banks and new taxes on the gambling sector are expected to finance higher wage bills, social benefits, and capital investments. - Parliament adopted an amnesty for pre-2021 household tax arrears and a tax exemption for transferring offshore assets to Georgia; near-term revenue implications are limited, but longer-term tax compliance concerns exist. - Medium-term fiscal guidance: - Staff analysis suggests a target debt level of around 40 percent of GDP to ensure public debt remains below the rule ceiling under adverse shocks. - This implies a corresponding fiscal deficit range of 2-2.5 percent of GDP, depending on long-term aging and climate costs (Annex VI). - The envisaged adjustment will be achieved by a reduction in capital expenditures as major road infrastructure projects have been completed. - Recommendations for fiscal management: - Prioritize among large infrastructure projects (Anaklia deep-water port, middle-corridor rehabilitation, hydropower projects, Black Sea cable). - Continue revenue mobilization: develop a medium-term revenue strategy, streamline tax expenditures, expand large taxpayer office operations to include subsidiaries, improve taxpayer audit capability, enterprise risk management, and human resource development. - Improve public investment management (PIM): select all new investment projects above GEL 20 million in the 2024 budget per updated PIM guidelines, develop a digital PIM module, require competitive procurement for PPP projects, and include fiscal cost and risk assessments for large projects in Fiscal Risks Statements. ### State-owned enterprises and renewable energy - SOE governance and renewable energy reforms: - The authorities’ draft SOE law retains a decentralized ownership model, contrary to the agreed centralized dual ownership model shared between MoF and MoE. - Staff recommends the law empower the MoF for strong oversight and ensure clear separation of shareholder, regulatory, and policy functions. - Authorities completed the first auction under the renewable energy support scheme in early-2023; the second round proceeded with monthly prices set by ESCO and increased generation capacity. - Staff recommends proceeding with electricity market opening, determining further support competitively, updating demand and supply projections, and terminating legacy projects that are not advancing to limit fiscal risks. - Fiscal transparency and GDF: - Non-market SOEs should be included in general government fiscal statistics. - The Partnership Fund amendment created the Georgian Development Fund (GDF) with clarified limits; GDF must operate commercially and independently in practice. - The forthcoming SOE law should apply to the GDF, including a financial oversight role for the MoF. ### Monetary policy, reserves, and NBG governance - Monetary policy normalization: - A gradual and cautious approach to further NBG policy rate cuts is needed to ensure core inflation remains close to target amid a tight labor market and strong credit growth. - With the policy rate close to neutral, further rate cuts should be data-driven and clearly communicated; the policy rate should remain the primary instrument to meet inflation objectives. - Exchange rate flexibility and reserve accumulation: - Continued exchange rate flexibility and reserve build-up are necessary; staff encouraged continued reserve accumulation as market conditions allow and intervening only to avoid disorderly FX market conditions. - With external inflows moderating, the NBG should refrain from defending the lari and depleting reserves. - NBG governance recommendations: - Uphold NBG independence to preserve macroeconomic credibility. - Amend the NBG law to: (i) ensure a non-executive majority on the NBG’s oversight board and limit discretionary transfers to the government, and (ii) clarify and strengthen the NBG succession framework and board member qualification criteria. - Shifting from a presidential to a collegial decision-making model is desirable. - Authorities’ stance on monetary parameters: - Authorities agree on gradual normalization but estimate terminal (neutral) rate at 6.5-7.5 percent; staff’s estimate is 7.5-8.25 percent. - Authorities cite a lower country risk premium following EU candidate status. - Authorities remain committed to a flexible exchange rate and to opportunistic FX purchases as market conditions allow; they see limited room for governance reforms before year end. ### Financial sector resilience and macroprudential policy - Macroprudential and regulatory measures: - Authorities introduced multiple measures to mitigate credit, currency, and concentration risks and to reduce dollarization; these measures should be streamlined and better informed by impact assessments (Annex VII). - Staff emphasized macroprudential tools serve financial stability objectives, while interest rates remain the primary instrument for monetary policy. - Long-term solutions to concentration and dollarization include improving competition in the banking system and strengthening macroeconomic policy frameworks. - Crisis management and resolution: - Progress on too-big-to-fail: improved corrective action framework, bridge bank playbook, contractual bail-in arrangements, MREL for domestic systemically important banks, and increased deposit insurance coverage. - Discussions underway on an ex-ante resolution fund; IMF TA suggested exploring legal amendments to enable the Deposit Insurance Fund to fund bank resolution. - Ongoing risks and regulatory priorities: - Vigilance needed for capital inflows, virtual assets, and sanctions. - Banks should maintain adequate loan loss reserves, liquidity, and capital buffers. - Establish an adequate framework for licensing, regulation, and supervision of VASPs and digital banks with fit and proper requirements and AML/CFT controls. - Progress required on FATF recommendations, particularly risk assessments, PEPs, adapting to new technologies, and supervisory sanctions. - All key recommendations of the 2021 FSSA were implemented or ongoing, except for setting a cash limit in certain transactions, which will be implemented in line with EU guidelines (Annex VIII). - Authorities’ macroprudential policies: - Pro-active use of macroprudential tools to prevent excessive leverage and reduce dollarization. - NBG committed to a cycle-neutral positive countercyclical capital buffer (CCyB) at 1 percent; compliance timing modified due to small banks' difficulties, with an increment set at 0.25 percent each year, ultimately reaching 1 percent by March 2027. - NBG committed to gradually increasing the floor for FX lending to further limit FX lending to unhedged borrowers. - Legislative frameworks introduced to register, regulate, and supervise VASPs fully compliant with FATF standards and respective EU regulations. ### Structural reforms to enhance inclusive growth - Constraints on potential growth: - Aging population and outward migration (especially youth), low educational attainment, infrastructure bottlenecks (transport and energy), low sectoral productivity (especially in agriculture), and limited competition exacerbated by unequal access to finance (Box 2). - Reform priorities and measures: - Tackle high unemployment and low rural labor force participation via vocational training, lowering disincentives to work while on targeted social assistance, enhancing teaching quality, raising agricultural productivity, improving land registration and management of state land. - Diversify the economy: boost trade diversification and regional connectivity via trade agreements and transport and energy investments (East-West highway, Anaklia deep water port, Black Sea cable); prioritize investments to reduce high transport and logistics costs. - Improve governance: bolster the judicial system, strengthen the anti-corruption authority, improve coverage and verification of asset declarations, and address high-level corruption and large-scale vested interests to support competitiveness and EU accession. *Source: 1geoea2024001 - 10. Inflation is expected to converge to target and the current account deficit to stabilize* ### 29. The authorities emphasized that they have a strong reform program aimed at many of ### 1geoea2024001 - 29. The authorities emphasized that they have a strong reform program aimed at many of ### Authorities’ reform program and structural initiatives - Ambitious educational reforms aim to improve teacher quality, especially in rural schools, and increase the provision of vocational education in Georgia. - The State Employment Support Agency continues to work closely with the private sector to shape the vocational curriculum to better align the supply and demand for skills. - The National Agency of Public Registry is completing a program to register all land in Georgia, which should facilitate the development of rural credit markets and spur investment—furthering structural transformation out of agriculture. - The authorities expressed their desire to maintain public capital expenditure at 8 percent of GDP to address Georgia’s significant infrastructure needs. - Authorities highlighted favorable comparisons to EU peers on various corruption metrics and stated that anti-corruption is high on the newly reshuffled government’s agenda; they noted disagreements with the OECD’s anti-corruption monitoring methodology and assessments. ### Growth: past performance, composition, and potential (Box 2) Findings - Georgia’s growth has averaged 5.6 percent from 2003-2023, driven mainly by investment. - Trend growth declined from above 7 percent in the early 2000s (before the global financial crisis of 2008-09) to below 5 percent prior to the pandemic. - Recent growth spiked due to migrant and FX inflows triggered by the war in Ukraine; staff expects this to primarily raise the level of GDP and have a limited impact on potential growth. - An expanding IT sector is identified as a high-productivity contributor supporting potential growth. - Productivity growth was driven by structural transformation away from agriculture; about one-third of growth in output per worker over this period is attributed to a declining share of workers in agriculture. - Relative to peers, Georgia still has a large share of employment in agriculture; close to two-thirds of Georgia’s agricultural workers, roughly 400,000 individuals, are subsistence farmers. - Agricultural productivity must continue to rise through better irrigation, public land management, and efficient targeting of government support. - As non-agricultural employment grows, productivity growth will increasingly need to come from raising in-sector efficiency rather than reallocation across sectors. - Evidence suggests employment growth is concentrated in low growth firms; improving access to finance (especially for SMEs), promoting competition in financial services, and investing in transport infrastructure should raise efficiency and productivity. - Labor supply is likely to be a drag on growth: Georgia’s population is estimated to fall by 2.6 percent by 2030, driven largely by outward migration. - Unemployment in Georgia in 2022 was 17.3 percent; around one third of unemployment is youth unemployment, with 30 percent of those in the labor force under thirty being unemployed. Two-thirds of these youth report no prior work experience. One fifth of unemployment is accounted for by those out of work for over 4 years. - Models suggest little room for further non-inflationary falls in unemployment from its 2023 rate of 15.3 percent without structural reform. - Using a model developed by Grant and Chan (2017), staff estimates potential growth in Georgia is around 5 percent. Recommendations (from Box 2) - Structural reforms to raise potential growth should focus on: raising agricultural productivity, increasing access to finance, developing transport infrastructure, and education reform. ### Outlook and macroeconomic projections (Staff Appraisal) Key projections and current conditions - Georgia has weathered multiple shocks since the Covid-19 pandemic; increased tourism, transit trade, immigration, and financial inflows linked to Russia’s war in Ukraine supported growth, fiscal and external balances, and the lari. - A strong lari contributed to a sharp fall in inflation and public debt, while robust growth helped lower unemployment and poverty. - Financial inflows have moderated but remain above pre-war levels, supporting a favorable economic outlook. - Growth is projected to slow to 5.7 percent in 2024, before converging to potential rate of 5 percent in the medium term. - Inflation is expected to pick up during 2024 as the impact of lari appreciation dissipates and monetary policy restrictiveness is unwound, and converge to the NBG’s 3 percent target in the medium term. - The current account deficit is expected to widen to 5.8 percent of GDP in 2024, and stabilize at around 5.5 percent of GDP as the services trade balance improves. Downside and upside risks - Downside risks: reversal of war-related migrant and financial inflows; intensification of sanctions that affect Georgia; backsliding on reforms in the context of parliamentary elections; increased influence of powerful elites and concerns about governance. - Upside: EU candidate status could send a positive signal for investments and provide impetus for reforms accelerating accession. ### Policy recommendations and priorities (Staff appraisal conclusions) Fiscal policy - Pursue modest further fiscal adjustment in the medium term to build buffers under the fiscal rule and create room for productive spending. - Fiscal deficits in the range of 2-2.5 percent of GDP would help stabilize public debt at around 40 percent of GDP and ensure it remains below the fiscal rule ceiling in adverse shocks. - The adjustment should be underpinned by a medium-term revenue strategy with improved revenue administration, streamlined tax expenditures, and enhanced project prioritization and spending efficiency. SOE and energy reforms - Steadfast implementation of SOE reform and renewable energy development strategies adopted in late-2022 is needed to raise productivity and limit fiscal risks. - The SOE law should ensure the MoF is empowered to have strong oversight to monitor and mitigate fiscal risks and ensure a clear separation between the state’s shareholder, regulatory, and policy functions to avoid conflicts of interest. - Proceed with electricity market opening; further support under the renewable energy support scheme should be determined competitively, based on updated demand and supply projections that net out legacy projects advancing under existing contracts. Monetary and FX policy - Anchor inflation at the NBG’s target with a gradual and cautious approach to further policy rate cuts; further rate cuts should be data-driven and clearly communicated to anchor expectations. - Continue exchange rate flexibility and opportunistic reserve build-up to guard against adverse external shocks; NBG should intervene in the FX market only to avoid disorderly market conditions and not to defend the lari. - Reserve coverage remains lower than desired; continued opportunistic reserve accumulation is needed. NBG governance - Strengthen the NBG’s governance and independence by amending the NBG law to: i) ensure a non-executive majority on the NBG’s oversight board, ii) clarify and strengthen the succession framework and board member qualification criteria, and iii) move from a presidential to collegial decision-making model. Financial sector and macroprudential policy - Maintain adequate loan loss reserves, liquidity, and capital buffers given uncertainty around FX inflows and global financial conditions; the banking system is well capitalized, profitable, and liquid but remains highly concentrated and dollarized. - Address concentration and dollarization sustainably by improving competition in the banking system and strengthening macroeconomic policy frameworks for stable growth and inflation. - Remain vigilant against financial sector risks from capital inflows, virtual assets, and sanctions; ensure proper licensing, regulation, and supervision of VASPs and digital banks with strong AML/CFT controls given large volumes of cross border FX and crypto transactions. Structural reforms for inclusive growth - Enhance education quality (teaching and training) and raise agricultural productivity (including via land registration and management) to address high unemployment and low rural labor force participation. - Prioritize investments in transport, logistics, and energy to lower trade costs, boost trade diversification, and enhance regional connectivity. - Bolster the judicial system and the anti-corruption authority to strengthen governance standards and support improved competitiveness. *Source: IMF staff report content from the provided PDF content unit.* ### 42. Staff recommends that the next Article IV consultation take place on the standard 12- ### 1geoea2024001 - 42. Staff recommends that the next Article IV consultation take place on the standard 12-month cycle. ### Real sector developments - Growth remained strong in 2023, driven largely by services and a significant contribution from investment. - Labor market and wages: - The unemployment rate is near historic lows while labor force participation is above pre-pandemic levels. - Real wages increased significantly, driven by strong growth and a tight labor market. - Prices and exchange rates: - Both headline and core inflation are below the NBG target. - The lari appreciated in both nominal and real effective terms well above pre-war and pre-pandemic levels. - Real GDP (annual percent change): 5.4; -6.3; 10.6; 11.0; 7.5; 5.7; 5.2; 4.7; 4.9; 5.0; 5.0 (2019–2029 series as presented). - Output Gap (percent): 3.7; -6.9; -2.4; 1.8; 2.4; 1.7; 1.0; 0.1; 0.0; 0.0; 0.0 (2019–2029 series as presented). - Nominal GDP (in billion of laris): 49.7; 49.8; 60.7; 72.9; 80.2; 88.6; 97.6; 106.1; 115.1; 125.1; 136.0 (2019–2029 series as presented). - CPI, Period average (percent): 4.9; 5.2; 9.6; 11.9; 2.5; 2.6; 4.2; 3.4; 3.0; 3.0; 3.0 (2019–2029 series as presented). - CPI, End-of-period (percent): 7.0; 2.4; 13.9; 9.8; 0.4; 4.0; 3.7; 3.0; 3.0; 3.0; 3.0 (2019–2029 series as presented). - Core CPI, End-of-period (percent): 5.2; 5.3; 5.9; 6.9; 2.0; ... (series continues with ellipses as in source). ### External sector developments - Trade and tourism: - The goods trade balance has improved recently with imports easing amid lower global prices. - Tourism revenues have bounced back and reflect seasonal patterns, with potential for a further recovery in the number of tourists towards pre-pandemic levels. - Remittances and transfers: - Net money transfers have declined recently, reflecting lower inflows from Russia, while remaining elevated. - Reserves and financial inflows: - International reserves have risen until recently, as the NBG made lower purchases amid subsiding FX inflows. - Strong FDI inflows have more than offset lower FX inflows. - Balance of payments headline figures (in millions of U.S. dollars, annual current account balance): -1,025; -1,981; -1,937; -1,120; -1,326; -1,906; -1,992; -2,113; -2,271; -2,423; -2,634 (2019–2029 series as presented). - Trade balance (goods, in millions of U.S. dollars): -3,792; -3,165; -3,790; -5,100; -6,093; -6,835; -7,402; -7,998; -8,648; -9,218; -10,018 (2019–2029 series as presented). - Gross international reserves (in millions of U.S. dollars): 3,506; 3,911; 4,363; 4,901; 5,010; 4,996; 5,363; 5,577; 5,950; 6,325; 6,916 (2019–2029 series as presented). - Current account balance (percent of GDP, memorandum): -5.8; -12.4; -10.3; -4.5; -4.3; -5.8; -5.6; -5.5; -5.5; -5.5; -5.5 (2019–2029 series as presented). ### Fiscal sector developments - Public debt and composition: - Public debt has fallen to pre-pandemic levels amid strong growth and lari appreciation. - The share of external debt remains high at about 73 percent of the total, while most of it is owed to official creditors. - General government debt (percent of GDP): 40.0; 59.6; 49.1; 39.2; 39.2; 38.8; 37.8; 37.5; 36.8; 36.7; 36.2 (2019–2029 series as presented). - Composition of public debt (percent, as of end-2023): Domestic 27.3; External: Multilateral 54.6; External: Bilateral 13.8; External: Eurobond 4.3 (values presented in figure). - Revenues and expenditures: - Tax revenue increased by 18 percent in 2023, much faster than the estimated nominal GDP growth rate, driven by buoyant VAT and income taxes amid strong activity and a growing formal economy. - Revenue and grants (percent of GDP): 26.8; 24.9; 25.2; 26.5; 27.6; 28.1; 27.7; 27.6; 27.6; 27.6; 27.6 (2019–2029 series as presented). - Total Expenditure (percent of GDP): 28.7; 34.1; 31.2; 29.0; 29.9; 30.7; 29.9; 29.8; 29.8; 29.8; 29.8 (2019–2029 series as presented). - Net lending / borrowing (percent of GDP): -1.8; -9.2; -6.0; -2.6; -2.3; -2.5; -2.2; -2.2; -2.2; -2.2; -2.2 (2019–2029 series as presented). - Spending composition: - Capital spending as a share of GDP has remained high, close to its historical peak in 2020. - Net acquisition of nonfinancial assets (percent of GDP): 7.5; 8.1; 6.9; 7.6; 7.6; 7.6; 6.6; 6.5; 6.6; 6.6; 6.6 (2019–2029 series as presented). ### Financial sector developments - Credit and asset quality: - Credit growth picked up in 2023, with lower GEL credit growth more than offset by higher FX credit growth. - NPLs have continued to decline, returning to their pre-pandemic low levels. - Profitability and margins: - Bank profitability has remained robust, owing to higher net interest income compared to pre-pandemic levels. - Key banking metrics (selected): - Return on assets (ROA) series (percent): 2.4; 0.1; 3.9; 3.1; 3.1; 3.6; 3.8; 3.9; 4.2; 4.3; 4.2 (as presented in Financial Soundness Indicators). - Return on equity (ROE) series (percent): 19.9; 1.4; 34.4; 20.8; 20.7; 24.8; 24.8; 24.9; 26.6; 26.9; 26.5 (as presented). - Dollarization and liquidity: - The interest rate differential between lari and FX deposits remains high. - Both loan and deposit dollarization have stabilized after their post-pandemic decline. - Deposit dollarization (percent of total): 64.0; 61.4; 59.9; 56.1; 47.0; 46.8; 46.5; 46.3; 46.1; 45.9; 45.6 (2019–2029 series as presented in Table 1). - Credit dollarization (percent of total): 55.4; 55.7; 50.9; 45.0; 44.5; 44.1; 43.7; 43.3; 42.9; 42.5; 42.1 (2019–2029 series as presented in Table 1). - Financial soundness highlights (selected indicators, Dec 2019–Dec 2023): - Nonperforming to total gross loans (IMF definition, percent): 1.9; 2.3; 1.9; 1.8; 1.9; 1.9; 1.7; 1.7; 1.7; 1.6; (series as presented). - Capital to risk-weighted assets (Basel III, percent): 19.5; 17.6; 19.6; 20.1; 20.3; 20.6; 20.3; 20.8; 21.0; 22.4; 22.2 (Dec series as presented). ### Key projections and memorandum figures (selected) - Investment (percent of GDP): 27.2; 24.6; 20.7; 24.1; 25.9; 23.8; 23.5; 24.3; 25.4; 26.6; 27.7 (2019–2029 series as presented). - Public investment (percent of GDP): 7.9; 8.5; 7.6; 8.2; 8.1; 7.9; 7.0; 6.8; 6.9; 6.9; 6.9 (2019–2029 series). - Private investment (percent of GDP): 19.2; 16.1; 13.1; 15.9; 17.8; 15.9; 16.6; 17.5; 18.6; 19.6; 20.8 (2019–2029 series). - Gross external debt (percent of GDP): 87.6; 109.4; 98.7; 81.0; 70.2; 66.7; 62.8; 58.5; 55.6; 53.1; 49.4 (2019–2029 series as presented). - Laris per U.S. dollar (period average): 2.82; 3.11; 3.22; 2.9; 2.63; ... (series continues with ellipses as in source). - Gross international reserves (in percent of ARA metric): 100.5; 107.4; 110.7; 102.2; 95.5; 94.8; 97.8; 99.7; 101.2; 103.0; ... (series as presented). *Source: 1geoea2024001; figures and tables cite National authorities, Haver, GeoStat, National Bank of Georgia, Ministry of Finance, and IMF staff calculations as presented in the source content.* ### Annex I. Key Recommendations of the 2021 Article IV ### Annex I. Key Recommendations of the 2021 Article IV Consultation ### Fiscal Policy: recommendations and implementation status - Recommendation: Rebuilding fiscal buffers — "A mildly contractionary fiscal stance in 2021, consistent with the ongoing post-pandemic recovery, saving any further additional revenue. Medium term fiscal consolidation to comply with the fiscal rule, reviewing tax expenditures, improving tax administration, and strengthening public investment management, while avoiding further compression of current spending." - Status: Implemented. - Findings: - "The overall fiscal deficit and public debt have declined markedly since 2020, and currently comply with the fiscal rules." - As part of the ongoing SBA, the authorities have: i) "published a first tax expenditure report and reviewed agricultural tax expenditures," ii) "improved processing of unrefunded VAT credits and credit claims," and iii) "updated the public investment management (PIM) guidelines and selected investment projects in the current budget accordingly." - Recommendation: Managing fiscal risks — "Comprehensive SOE reform strategy to manage and mitigate fiscal risks." - Status: Implemented. - Finding: "As part of the ongoing SBA, the authorities have developed an SOE governance reform strategy to enhance productivity and limit fiscal risks." ### Monetary and Exchange Rate Policy - Recommendation: Reducing inflation — "Further tightening of monetary policy stance if there is evidence of entrenched high inflation expectations." - Status: Implemented. - Finding: "The authorities tightened monetary policy and inflation has been brought under control, helped also by lower commodity prices, a stronger lari, and macroprudential policies." ### Financial Sector Policies - Recommendation: Ensuring financial sector resilience — "Maintaining adequate buffers and provisions in the financial sector, preserving banking system capital and dealing with NPLs to restore balance sheet health and profitability as the recovery solidifies." - Status: Implemented. - Findings: - "Bank capital and liquidity buffers have been restored and profitability has improved." - "NPLs have been written down and fully provisioned, and returned to pre-pandemic lows." ### Structural Policies - Recommendation: Promoting a stronger and more inclusive recovery — "Comprehensive education reform complemented with cost-effective active labor market policies to deal with entrenched unemployment, as well as actions to diversify exports, attract FDI, and increase productivity." - Status: Ongoing. - Actions taken: - "Support employment by developing vocational training for high demand skills and lowering disincentives to work while on targeted social assistance." - "Boost competitiveness and diversification by pursuing regional trade agreements and investing in transport and energy infrastructure." - "Georgia’s 2030 development strategy has education as a core pillar, which should help increase productivity and lower unemployment." ### Final implementation snapshot - Overall: Recommendations focused on i) rebuilding fiscal buffers and managing risks, ii) achieving the inflation target, iii) ensuring a resilient financial sector, and iv) promoting a stronger and more inclusive recovery. - Authorities' progress: "The authorities have made good progress on implementing the recommendations." *Source: Annex I. Key Recommendations of the 2021 Article IV Consultation — IMF staff summary as provided in the source content.* --- ### Annex II. Risk Assessment Matrix — Key risks, impacts, and policy responses - Note on RAM: "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. The conjunctural shocks and scenarios highlight risks that may materialize over a shorter horizon (between 12 to 18 months) given the current baseline. Structural risks are those that are likely to remain salient over a longer horizon." - Conjunctural Risks - Intensification of regional conflict(s) (High). - Impact: High: "Although spillovers from the war in Ukraine have been contained so far, intensified war and sanctions could lower tourism, trade, remittances, and investments, while increasing depreciation pressures and inflation. Sanctions may lead to regulatory risks for financial institutions including related to AML/CFT issues. On the upside, capital and migrant inflows (workers and companies) from Russia, as well as trade rerouted through Georgia could also increase under intensified sanctions, boosting 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 that could jeopardize financial stability. Maintain tight monetary policy to keep inflation expectations anchored and avoid capital outflows. Accelerate diversification of trade markets and routes." - Commodity price volatility (High). - Impact: High: "Rising global commodity prices would 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." - Abrupt global slowdown (Medium). - Impact: High: "A global recession scenario would lower tourism, trade, remittances, and investments, while increasing depreciation, inflation, 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 that would jeopardize financial stability." - Monetary policy miscalibration (Medium). - Impact: Medium: "Persistently high inflation, including from a premature loosening in monetary policy in major central banks and rising global commodity prices could de-anchor inflation expectations and further diminish households’ purchasing power." - Policy response: "Allow flexible exchange rate to act as a shock absorber. Tighten monetary policy, communicating and signaling strong commitment to inflation targeting. Reprioritize spending to provide targeted fiscal support to the most vulnerable." - Systemic financial instability (Medium). - Impact: Medium: "Financial market disruptions could trigger a rapid exchange rate depreciation, undermining confidence in the currency and increasing inflation expectations. Depreciation in a highly dollarized economy could hurt growth and threaten financial stability as households and firms struggle to repay loans. Higher inflation and depreciation expectations could result in a vicious cycle of loan conversions putting further pressure on the currency." - Policy response: - "Maintain tight monetary policy to ensure confidence in the currency and keep inflation expectations anchored." - "Allow the exchange rate to adjust to new fundamentals." - "Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability." - "Use recently strengthened resolution framework and consider if further enhancements to the framework are needed to ensure that financial stability challenges can be addressed." - "Allow use of capital and liquidity buffers to cope with shocks." - "Adjust macroprudential measures to avoid an undue tightening of financial conditions." - "Enforce provisioning rules in line with international best practices." - Sovereign debt distress (Medium). - Impact: Medium: "While sovereign debt distress is a low probability event in Georgia given a moderate public debt level, a sharp depreciation amid high dollarization and higher borrowing costs could hurt growth, increase fiscal pressures, and threaten financial stability as households and firms struggle to repay loans." - Policy response: "Allow flexible exchange rate to act as a shock absorber. Recalibrate fiscal policy to comply with the deficit and debt ceilings unless the escape clause is triggered. Reprioritize spending to support the most vulnerable. Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability." - Social discontent (Medium). - Impact: Medium: "Political polarization and social tensions could result in disorderly lari depreciation. Social tensions might undermine the ability of policymakers to implement structural reforms. They could also threaten external financing flows from international financial institutions on which Georgia relies." - Policy response: "Improve communication about economic policy – especially in terms of setting a medium-term reform agenda. Maintain commitment and ownership of reforms. Utilize foreign exchange reserves to prevent a disorderly depreciation that would jeopardize financial stability." - Structural Risks - Deepening geo-economic fragmentation (High). - Impact: Medium: "Accelerating de-globalization would put the merits of Georgia’s efforts to become a logistics hub in doubt. The country would need to find a new source of future growth that is less reliant on the external environment." - Policy response: - "Allow the exchange rate to adjust to reflect the new fundamentals." - "If inflation is under control, utilize monetary policy space to ensure that the output gap does not stay negative for too long." - "Extend targeted measures to support individuals and businesses by reprioritizing spending." - "Implement structural reforms that allow the economy to move more flexibly to take advantage of emerging sources of growth." - Country Specific Risks - Fiscal risks (Medium). - Impact: Medium: "The need to cover contingent liabilities could complicate efforts to comply 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 (Medium). - Impact: Medium: "Policy uncertainty could undermine confidence and hurt investment and growth." - Policy response: "Maintain macroeconomic policy discipline. Strengthen social safety nets to protect the most vulnerable segments of the population and ensure that growth is sufficiently inclusive." *Source: Annex II. Risk Assessment Matrix — IMF staff summary as provided in the source content.* --- ### Annex III. Sovereign Risk and Public Debt Sustainability Assessment (DSA) — key findings - Overall assessment - "Overall ... Low" - Commentary: "Georgia is at a low overall risk of sovereign stress, and public debt is sustainable." - Rationale: "The overall risk of sovereign stress is low, reflecting low levels of vulnerability in both the near and medium-term modules. The debt level is projected to be relatively low and stable under the baseline, supported by prudent fiscal policy and strong economic growth." - Near term - Mechanical signal: Low - Final assessment: Low - Comment: "The near-term stress signal is 'low' in 2023 in line with the mechanical signal, given the reduced debt burden and the cyclical position of the economy including the low current account deficit." - Medium term - Mechanical signal: Low - Final assessment: Low - Comment: "Medium-term risks are assessed as 'low' in line with the aggregate medium-term mechanical signal on the basis of balanced risks around the debt baseline, and manageable gross financing needs." - Sub-notes: "Fanchart Moderate ...", "GFN Low ..." - Long term - Final assessment: Low - Comment: "Climate change mitigation and adaptation needs will lead to higher amortization than in the past, but under a baseline scenario, in line with the Georgia’s climate change strategy, debt is likely to remain sustainable in the long-term." - Sustainability assessment - "Sustainable with high probability" - "The projected debt path is expected to stabilize and GFNs will remain at manageable levels. Debt is assessed as sustainable with high probability." - "Debt stabilization in the baseline Yes" - DSA summary commentary (verbatim): - "Georgia is at a low overall risk of sovereign stress, and public debt is sustainable. After a short-lived surge in 2020 to 60 percent of GDP, reaching the upper limit of the fiscal rule, general government debt declined below 40 percent of GDP in 2022, and has been stable since then. This was driven by strong growth and inflation, as well as lari appreciation especially since 2022. Debt is expected to remain stable below 40 percent of GDP in the medium term, as fiscal deficits remain modest in compliance with the fiscal rule. Over the longer run, reforms should continue to tackle risks arising from climate change mitigation and adaptation needs." - Debt coverage and disclosures (selected points) - Subsector inclusion in the DSA baseline: - "Budgetary central government — Yes" - "Extra budgetary funds (EBFs) — No" - "Social security funds (SSFs) — No" - "State governments — Yes" - "Local governments — Yes" - "Public nonfinancial corporations — No" - "Central bank — No" - "Other public financial corporations — No" *Source: Annex III. Sovereign Risk and Public Debt Sustainability Assessment — IMF staff summary as provided in the source content.* ### 5. Debt consolidation across sectors: ### 1geoea2024001 - 5. Debt consolidation across sectors ### Public debt structure and authorities' strategy - Commentary: "The share of foreign currency debt is expected to decline below 65 percent by 2026, as per the authorities' debt management strategy to mitigate exchange rate risks." - Projection chart highlights (general government perimeter): - Debt by currency (percent of GDP): time series shown for 2014–2032 with categories "Foreign currency", "Local currency", "Local-linked". - Public debt by holder (percent of GDP): categories include "External private creditors", "External official creditors", "Domestic other creditors", "Domestic commercial banks". - Public debt by governing law, 2023 (percent): "Domestic law", "Foreign law ex. multilateral", "Multilateral". - Debt by instruments (percent of GDP): "Currency & deposits", "Loans", "Debt securities", "Other acct. payable". - Public debt by maturity (percent of GDP): buckets "≤ 1 year", "1-5 years", "> 5 years"; residual maturity: "6. years". - Marketability: "Marketable debt" vs "Nonmarketable debt" over 2019–2029. ### Baseline scenario (Table 2) — key projections and contributors - Commentary: "Public debt is expected to decrease gradually from about 40 percent of GDP in 2022 to below 37 percent of GDP over the medium-term mostly due to favorable interest-growth differentials. Gross financing needs are expected to remain manageable at below 5.5 percent of GDP over the medium term. Residual contributions include changes in government deposits." - Actual and projected public debt (Percent of GDP): - 2023: 39.2 - 2024: 37.9 - 2025: 37.8 - 2026: 37.4 - 2027: 37.4 - 2028: 37.1 - 2029: 36.2 - 2030: 35.4 - 2031: 34.5 - 2032: 34.0 - 2033: 33.4 - Change in public debt (Percent of GDP): - 2023: 0.1 - 2024: -1.3 - 2025: -0.1 - 2026: -0.4 - 2027: 0.0 - 2028: -0.3 - 2029: -0.8 - 2030: -0.8 - 2031: -0.9 - 2032: -0.5 - 2033: -0.6 - Contribution of identified flows (Percent of GDP): - 2023: -3.1 - 2024: -1.0 - 2025: 0.2 - 2026: -0.2 - 2027: 0.1 - 2028: -0.4 - 2029: -0.5 - 2030: -0.5 - 2031: -0.6 - 2032: -0.3 - 2033: -0.4 - Primary deficit (Percent of GDP): - 2023: 1.2 - 2024: 1.1 - 2025: 0.6 - 2026: 0.6 - 2027: 0.7 - 2028: 0.7 - 2029: 0.8 - 2030: 0.9 - 2031: 0.9 - 2032: 0.9 - 2033: 0.8 - Noninterest revenues (Percent of GDP): 2023: 27.2; 2024: 27.8; 2025: 27.4; 2026: 27.3; 2027: 27.3; 2028: 27.4; 2029: 27.3; 2030: 27.3; 2031: 27.3; 2032: 27.2; 2033: 27.4 - Noninterest expenditures (Percent of GDP): 2023: 28.4; 2024: 28.9; 2025: 28.1; 2026: 27.9; 2027: 28.0; 2028: 28.1; 2029: 28.1; 2030: 28.1; 2031: 28.1; 2032: 28.1; 2033: 28.1 - Automatic debt dynamics (Percent of GDP): 2023: -4.9; 2024: -1.4; 2025: -1.1; 2026: -0.8; 2027: -0.8; 2028: -0.9; 2029: -1.0; 2030: -1.0; 2031: -1.1; 2032: -1.1; 2033: -1.2 - Real interest rate and relative inflation (Percent): - 2023: 0.3 - 2024: 0.7 - 2025: 0.8 - 2026: 0.9 - 2027: 0.9 - 2028: 0.9 - 2029: 0.8 - 2030: 0.7 - 2031: 0.6 - 2032: 0.5 - 2033: 0.5 - Real interest rate (Percent): 2023: 0.5; 2024: 0.3; 2025: 0.2; 2026: 0.5; 2027: 0.6; 2028: 0.5; 2029: 0.4; 2030: 0.4; 2031: 0.3; 2032: 0.3; 2033: 0.2 - Relative inflation (Percent): 2023: -0.2; 2024: 0.5; 2025: 0.6; 2026: 0.4; 2027: 0.4; 2028: 0.4; 2029: 0.3; 2030: 0.3; 2031: 0.3; 2032: 0.2; 2033: 0.2 - Real growth rate (Percent): 2023: -2.7; 2024: -2.1; 2025: -1.9; 2026: -1.7; 2027: -1.7; 2028: -1.8; 2029: -1.8; 2030: n.a.; 2031: -1.7; 2032: -1.7; 2033: -1.6; 2034: -1.6 (ellipsis in source) - Other identified flows (Percent of GDP): 2023: 0.6; 2024: -0.7; 2025: 0.6; 2026: -0.1; 2027: 0.2; 2028: -0.2; 2029: -0.3; 2030: -0.4; 2031: -0.4; 2032: -0.1; 2033: 0.0 - Contingent liabilities (Percent of GDP): all years 0.0 - Contribution of residual (Percent of GDP): 2023: 3.1; 2024: -0.3; 2025: -0.3; 2026: -0.2; 2027: -0.1; 2028: 0.1; 2029: -0.3; 2030: -0.3; 2031: -0.3; 2032: -0.2; 2033: -0.2 - Gross financing needs (Percent of GDP): - 2023: 5.6 - 2024: 5.7 - 2025: 5.1 - 2026: 5.6 - 2027: 5.3 - 2028: 5.0 - 2029: 5.0 - 2030: 5.2 - 2031: 5.9 - 2032: 5.0 - 2033: 5.1 - Of which: debt service (Percent of GDP): 2023: 4.8; 2024: 4.9; 2025: 4.7; 2026: 5.2; 2027: 4.8; 2028: 4.5; 2029: 4.4; 2030: 4.6; 2031: 5.2; 2032: 4.3; 2033: 4.5 - Local currency gross financing needs (Percent of GDP): 2023: 2.8; 2024: 2.8; 2025: 2.6; 2026: 1.9; 2027: 2.9; 2028: 2.5; 2029: 2.5; 2030: 2.8; 2031: 2.7; 2032: 2.7; 2033: 3.0 - Foreign currency gross financing needs (Percent of GDP): 2023: 2.0; 2024: 2.2; 2025: 2.1; 2026: 3.3; 2027: 1.9; 2028: 2.0; 2029: 1.9; 2030: 1.8; 2031: 2.5; 2032: 1.6; 2033: 1.5 - Memo: Real GDP growth (percent): 2023: 7.5; 2024: 5.7; 2025: 5.2; 2026: 4.7; 2027: 4.9; 2028: 5.0; 2029: 5.0; 2030: 5.0; 2031: 5.0; 2032: 5.0; 2033: 5.0 - Memo: Inflation (GDP deflator; percent): 2023: 2.8; 2024: 4.1; 2025: 4.7; 2026: 3.8; 2027: 3.5; 2028: 3.5; 2029: 3.5; 2030: 3.5; 2031: 3.5; 2032: 3.5; 2033: 3.5 - Memo: Nominal GDP growth (percent): 2023: 10.1; 2024: 10.4; 2025: 10.2; 2026: 8.7; 2027: 8.5; 2028: 8.7; 2029: 8.7; 2030: 8.7; 2031: 8.7; 2032: 8.7; 2033: 8.7 - Memo: Effective interest rate (percent): 2023: 4.2; 2024: 4.9; 2025: 5.2; 2026: 5.2; 2027: 5.2; 2028: 5.0; 2029: 4.8; 2030: 4.6; 2031: 4.4; 2032: 4.3; 2033: 4.2 ### Realism of baseline assumptions (Figure 3) - Commentary: "Realism analysis does not point to major concerns. Past forecast errors do not reveal any systematic biases and the projected fiscal adjustment and debt reduction are well within norms." - Forecast track record references: projections made in the October and April WEO vintages. - Distributional diagnostics and percentile ranks shown for public debt to GDP, primary deficit, r - g, exchange rate depreciation, and historical output gap revisions. - Indicators cited: - 3-year adjustment above 75th percentile: "(2 ppts of GDP)" noted. - 3-year debt reduction above 75th percentile: "(5.9 ppts of GDP)" noted. - Percentile rank values cited e.g., "58" and "63.5" in charts. ### Near-term risk analysis (Figure 4) - Commentary: "The near-term mechanical stress signal remains 'low' in 2023. Low debt burden and cyclical factors contributed to a low fitted probability in 2023. Continued prudent management of public finance management as projected over the near term would help reduce risks from the cyclical position and adverse global conditions." - Change in LSP (years shown: 2020–2023) and contributions to change in LSP: - Change in LSP: 2021-22: 0.343; 2022-23: -0.328; 2023-24: -0.039; 2024-25: 0.005 - Institutional quality contributions: 0.006, 0.004, 0.000, 0.000 - Stress history contributions: 0.000, 0.000, -0.003, 0.000 - Cyclical position contributions: 0.024, 0.146, -0.069, 0.000 - Debt burden & buffers contributions: 0.199, -0.293, -0.010, 0.029 - Global conditions contributions: 0.111, -0.185, 0.044, -0.024 - Prob. of false alarm, 2024-2025 (if stress predicted): 40.5 pct. - Logit stress probability chart indicates "Low risk" vs "High risk" evolution for 2020–2023. ### Medium-term risk analysis (Figure 5) - Commentary: "Of the two medium-term tools, the GFN Finance-ability Module suggests a low level of risk, while the Debt Fanchart Module indicates medium level of risks. The latter is largely due to a relatively wide estimated fan width likely related to historical volatility." - Key indicators and values: - Fanchart width: 53.9 0.8 - Probability of debt not stabilizing (pct): 29.8 0.3 - Terminal debt level x institutions index: 13.3 0.3 - Debt fanchart index: ...1.3 - Average GFN in baseline: 5.0 1.7 - Bank claims on government (pct bank assets): 6.6 2.1 - Change in claims on govt. in stress (pct bank assets): 2.1 0.7 - GFN financeability index: ...4.6 - Prob. of missed crisis, 2024-2029 (if stress not predicted): 9.1 pct. - Prob. of false alarm, 2024-2029 (if stress predicted): 58.0 pct. - Module risk signals: - Debt fanchart module: Moderate - GFN financeability module: Low - Charts present final fanchart (percent of GDP), Gross Financing Needs (percent of GDP), and Medium-term index (MTI) values and thresholds. ### Long-term risk analysis and climate scenarios (Figure 6) - Commentary: "Georgia’s 2030 Climate Change Strategy estimates total budget of GEL 3.5 billion for the 10-year action plan. With such investment of a little over 0.3 percent of GDP, debt is likely to be sustainable in the long-term, with downside risks in case the investments are not sufficient to offset adverse effects on GDP growth. While climate actions are expected to increase the gross financing needs and debt levels, they are projected to remain stable over the medium term." - Climate investment and fiscal scale: - Total budget: GEL 3.5 billion for 10-year action plan. - Investment equivalent: "a little over 0.3 percent of GDP." - Scenario illustrations: - Climate Change: Adaptation — impacts on GFN-to-GDP ratio and Total public debt-to-GDP ratio are shown under baseline and "With climate adaptation (customized scenario)" and a "Large amortization: Extension of fifth projection year" variant. - Climate Change: Mitigation — similar presentation for mitigation scenarios with GFN-to-GDP and total public debt-to-GDP under baseline, "With climate mitigation (customized scenario)", and "Large amortization: Extension of fifth projection year". *Source: 1geoea2024001 - 5. Debt consolidation across sectors (chapter/section content).* ### Annex IV. External Sector Assessment ### Annex IV. External Sector Assessment ### Overall assessment - Georgia's external position in 2023 was broadly in line with the level implied by medium-term fundamentals and desirable policy settings based on the results of the IMF's EBA-lite current account model. - External vulnerabilities decreased relative to 2022 due to: - a continued strong recovery in services exports, - moderating but still robust remittances, - FDI, and migrant-related inflows. - End-2023 gross international reserves (GIR) coverage is estimated below 100 percent of the ARA metric. - If banks’ external assets are considered, GIR coverage improves to 115 percent but remains below the authorities’ desirable range of 120-130 percent during the projection period. - Potential policy responses: - Continued prudent fiscal policy and greater exchange rate flexibility in the context of the inflation-targeting framework. - The NBG should continue FX purchases if market conditions allow, and conduct FX sales only to avoid disorderly market conditions. - Further structural reforms: investments in transport and energy infrastructure, developing the IT services sector, and improving governance to attract foreign investors. ### Foreign assets and liabilities: position and trajectory - NIIP narrowed to negative 98.3 percent of GDP by end-2023 from negative 136 percent in 2019, despite a deterioration in nominal terms by close to 6 billion over the same period, owing primarily to an increase in USD-valued GDP. - Reduction in gross liabilities accounts for most of the improvement over the last five years. - Since end-2021, the NIIP-to-GDP ratio declined by 43 percentage points, supported by: - improvement in the net portfolio position (9.5 percent of GDP), - reduction in government other investment liabilities (12 percent of GDP). - Composition of gross liabilities at end-2023: - FDI accounted for more than 53 percent of gross liabilities, - loans close to 24 percent of gross liabilities. - External general government debt declined by nearly 14 percentage points of GDP, from around 42 percent at end-2021 to around 28 percent by end-2023. - Non-bank corporate sector debt fell by around 10.5 percentage points of GDP since end-2021, driven by a reduction in debt securities. - Bank debt liabilities increased by nearly $2.5 billion (8 percent of GDP), driven primarily by short-term currency and deposits. - Banks’ increased deposit liabilities are hedged by a similar rise in banks' external assets, largely in debt securities and short-term deposits with banks abroad. - Medium-term outlook: NIIP expected to remain negative but evolve broadly in line with projected current account deficits; its favorable composition (tilt toward FDI and longer-term maturities) mitigates risks. - Key 2023 stock figures (in percent of GDP): - NIIP: -98.3 - Gross Assets: 52.9 - Debt Assets: 9.7 - Gross Liab.: 151.2 - Debt Liab.: 54.5 ### Current account - 2022 to 2023: After a 5.9 percentage point improvement in 2022 to 4.5 percent of GDP, the current account (CA) deficit narrowed by 0.2 percentage points to 4.3 percent of GDP in 2023. - Drivers of the 2023 improvement: - total trade balance improved by 1.1 percentage point of GDP (temporary factors in goods trade balance), - tourism revenues increased 17 percent y/y, reaching almost 126 percent of the 2019 level, - net investment income improved by 0.6 percentage point of GDP, - remittances declined by 1.3 percentage points of GDP. - From the savings-investment balance perspective, the decrease in the 2023 CA deficit reflects weaker private investments and a reduction in the fiscal deficit, which more than offset the decrease in private savings. - Projections: - 2024 CA deficit expected to widen to 5.8 percent of GDP (still below historical average) due to moderating remittances and deterioration in goods trade (lower car re-exports and metal exports). - Over the medium term, the CA deficit expected to gradually improve to 5.5 percent of GDP, supported by further recovery in tourism volumes and moderating imports as growth returns to potential and lari weakens. - EBA-lite model (2023, percent of GDP): - CA-Actual: -4.3 - Cyclical contributions (from model): (-)-0.2 - Additional temporary/statistical factors: 0.6 - Adjusted CA: -4.7 - CA Norm (from model): -5.5 - Adjusted CA Norm: -5.5 - CA Gap: 0.8 -1.1 - o/w Relative policy gap: 3.7 - Elasticity: -0.4 - REER Gap (in percent): -2.2 3.0 - Assessment: Adjusted current account balance of -4.7 percent of GDP is slightly above the CA norm in 2023 of -5.5 percent of GDP, implying a positive gap of 0.8 percent of GDP. The 2023 CA gap corresponds to a small REER undervaluation of 2.2 percent by the CA approach; the REER index approach indicates a small overvaluation of 3.0 percent. ### Real exchange rate - Background: - Since its lowest level in February 2021 until end-December 2023: - REER appreciated by around 35.7 percent, - NEER appreciated by 70 percent. - During 2023, declining NBG policy interest rates, FX inflows, and NBG FX purchases led to a weakening of the lari in real terms by 0.9 percent. - The NEER experienced an additional appreciation of around 14 percent over the same period due to a favorable inflation differential with trading partners. - The recent nominal appreciation episode should unwind as war-related remittances, tourism, and capital inflows return closer to pre-war levels. - Assessment: CA and REER index approaches suggest only small CA gaps in 2023; given caveats and uncertainty related to the war in Ukraine, results should be interpreted cautiously. Authorities are advised to sustain reform agenda to enhance external competitiveness and raise net private savings. ### Capital and financial accounts: flows and policy measures - Financial account surplus decreased to 4.3 percent of GDP in 2023, about 3.2 percentage points smaller than in 2022, due to smaller donor-related disbursements and continued accumulation of portfolio and other investment assets. - Net portfolio outflows were smaller, but other investment inflows and net FDI inflows were lower in 2023 than in 2022. - These trends significantly contributed to the improvement in the NIIP. - Financial inflows are expected to moderately increase over the medium term, supported by medium- and long-term external borrowing and stable inflows of FDI. - Assessment: The smaller financial account surplus in 2023 reflects strong gross financial inflows and asset accumulation, which improved banks’ FX liquidity buffers and allowed significant FX purchases by the central bank. As war-related inflows normalize and the CA deficit widens in the near term, external financing will remain crucial. ### FX intervention and reserves level - GIR increased by around $109 million in 2023 to $5 billion (16.4 percent of GDP). - Large net FX purchases ($1,279 million) and significant donor financing supported the increase, mostly offset by outflows from required reserves (RR) on short-term FX deposits and higher FX conversions for the government, including for debt service. - At end-2023, GIR coverage fell to 95 percent of the ARA metric, primarily due to increased non-resident deposits with commercial banks and other liabilities. - Banks’ non-resident deposits with commercial banks are covered mainly by banks’ foreign assets, including short-term liquid assets that banks must hold to comply with macroprudential regulations. - Example: banks’ liquid assets ($2.2 billion) invested in foreign securities or placed as deposits with foreign banks broadly cover short-term obligations to non-residents ($3.1 billion). - If the ARA metric includes only the uncovered part of the non-resident deposits ($1 billion), GIR coverage increases to over 115 percent. - Staff projection: - GIR coverage at end-2024 expected to remain nearly 95 percent of the ARA metric (unadjusted) in the baseline before gradually increasing to 103.0 percent by end-2028. - GIR coverage of the ARA metric expected to remain broadly stable but below 100 percent in 2024, reflecting a wider current account deficit and moderating financial net inflows. - GIR coverage based on the adjusted ARA metric is projected to stay below the authorities’ desirable range of 120-130 percent. - Reserve adequacy table highlights (selected values): - GIR (2022): 4,901 - GIR (2023): 5009.7 - GIR (2024): 4,996 - GIR (2025): 5,363 - GIR (2026): 5,577 - GIR (2027): 5,950 - GIR (2028): 6,325 - GIR (Percent of ARA metric) (2023): 95.5 - GIR (Percent of ARA metric) (2028): 103.0 - GIR (Percent of adjusted ARA metric) (2023): 115.2 - GIR (Percent of adjusted ARA metric) (2028): 112.1 - GIR (Month of imports) (2023): 3.4 ### External debt sustainability (Annex V highlights) - Baseline: external debt expected to decline steadily through the projection horizon, from just over 70 percent of GDP by 2023 to around 49 percent of GDP by 2029. - Historical context: - External debt peaked in 2020 at more than 110 percent of GDP (increase of more than 22 percentage points) due to large IFI borrowings and a sharp drop in USD-denominated GDP. - 2021 external debt ratio decreased by more than 10 percentage points of GDP. - External debt-to-GDP further decreased sharply to just over 70 percent by 2023, driven by low GEFN and higher nominal USD-denominated GDP. - Stress tests: - Most standard shock scenarios suggest external debt-to-GDP would be near or below its 2023 level in the medium term for individual shocks to the real interest rate, real GDP growth, and the non-interest current account balance (all with permanent ½ standard deviation shocks), and a combined shock (permanent ¼ standard deviation shocks). - A one-time real depreciation of 30 percent in 2024 would cause external debt-to-GDP to rise sharply, peaking at around 99 percent, then decline steadily to below 73 percent by 2029 (remaining above its 2023 level). - External debt would remain steady under the historical scenario (ten-year averages), though this scenario is deemed less relevant under the current policy framework. - Table 1 key baseline figures (external debt in percent of GDP): - 2018: 81.7 - 2019: 87.6 - 2020: 109.4 - 2021: 98.7 - 2022: 81.0 - 2023: 70.2 - 2024 (baseline): 66.7 - 2025: 62.8 - 2026: 58.5 - 2027: 55.6 - 2028: 53.1 - 2029: 49.4 - Change in external debt (percent of GDP): - 2023: -10.8 - 2024: -14.3 - 2025: -3.9 - 2026: -4.3 - 2027: -2.9 - 2028: -2.6 - 2029: -3.6 - Identified external debt-creating flows (4+8+9) as percent of GDP: - 2023: -4.9 - 2024: -1.9 - 2025: -2.2 - 2026: -2.0 - 2027: -2.4 - 2028: -2.7 - 2029: -2.6 - Current account deficit, excluding interest payments (percent of GDP): - 2023: 2.4 - 2024: 3.5 - 2025: 3.2 - 2026: 3.4 - 2027: 3.6 - 2028: 3.7 - 2029: 3.8 - Gross external financing need (in billions of US dollars and percent of GDP): - 2023: 6.1 (20.1 percent of GDP) - 2024: 6.1 (18.7 percent of GDP) - 2025: 7.2 (20.3 percent of GDP) - 2026: 6.6 (17.4 percent of GDP) - 2027: 7.2 (17.4 percent of GDP) - 2028: 7.0 (15.9 percent of GDP) - 2029: 7.4 (15.6 percent of GDP) - Key macroeconomic assumptions underlying baseline (selected): - Real GDP growth (percent): 2023: 7.5; 2024: 5.0; 2025: 4.8; 2026: 5.7; 2027: 5.7; 2028: 5.2; 2029: 4.7 - GDP deflator in US dollars (change in percent): 2023: 14.1; 2024: 1.3; 2025: 10.5; 2026: 1.5; 2027: 2.8; 2028: 2.7; 2029: 2.4 - Nominal external interest rate (percent): 2023: 3.0; 2024: 4.4; 2025: 1.2; 2026: 3.6; 2027: 3.8; 2028: 3.6; 2029: 3.5 *Prepared by IMF staff.* ### Annex VI. A Fiscal Anchor Beyond the Fiscal Rule ### Annex VI. A Fiscal Anchor Beyond the Fiscal Rule ### Fiscal rules framework and history - Georgia enshrined numerical fiscal rules in its constitution in 2011 via the Economic Liberty Act (ELA, 2011), in effect from 2013, which: - introduced fiscal rule ceilings for state debt (60 percent of GDP), the consolidated budget deficit (3 percent of GDP), and expenditures (30 percent of GDP); - required nationwide referendum to introduce new state taxes or increase top marginal state tax rates except for excise taxes. - December 2018 ELA amendments (in line with IMF TA recommendations) strengthened the framework by: - eliminating the 30 percent of GDP expenditure ceiling; - widening the coverage of the debt ceiling to include PPP commitments and general government (including legal entities of public law (LEPLs)); - stipulating both budget plans and outturns should comply with the rules; - requiring government reporting on rule compliance, reasons for noncompliance, effects on future budgets, and mitigation measures; - clarifying escape clauses and mandating a plan to return to compliance within three years of noncompliance. - Fiscal rules can be suspended i) in case of an extraordinary or a military state of affairs and ii) during an economic slowdown or recession, defined as two consecutive quarters of y/y real growth that is 2 percentage points lower than the average real growth of the past 10 years; a parliamentary majority is needed to suspend the rules. ### Compliance record and transparency issues - The government has complied with the debt and deficit rule ceilings and reporting requirements since their adoption, except for 2020-21 when the rules were suspended due to the pandemic; a return to compliance was required for 2023. - Ministry of Finance has reported annually on compliance and plans to return to compliance since 2018; the Parliamentary Budget Office (PBO) has reported independently since 2016. - Limitations in measuring compliance: budget execution reports do not include non-market SOEs, preventing accurate measurement of compliance. Non-market SOEs reported a small fiscal surplus of 0.1 percent of GDP in 2021. - Budget expenditure reports showed expenditures exceeding appropriations by small margins during 2017-21 due to donor payments exceeding budget estimates. - There is no requirement for the government to explicitly declare and justify its intention to invoke the escape clause, nor to specify expected duration of the exemption. ### Outturns (selected fiscal statistics) - Budget Deficit (outturns in percent of GDP): - 2014: 1.8 - 2015: 1.3 - 2016: 1.4 - 2017: 0.5 - 2018: 0.7 - 2019: 2.6 - 2020: 9.0 - 2021: 6.3 - 2022: 2.2 - 2023: 2.2 - Public Debt (outturns in percent of GDP): - 2014: 31.0 - 2015: 37.0 - 2016: 40.7 - 2017: 40.2 - 2018: 39.8 - 2019: 40.8 - 2020: 60.4 - 2021: 49.7 - 2022: 39.3 - 2023: 39.3 ### Rationale for a medium-term fiscal anchor - In a volatile environment with high exposure to external shocks and fiscal risks, medium-term fiscal targets should maintain buffers inside fiscal rule ceilings to withstand unexpected shocks and long-term trends (aging, climate change). - A “safe” debt level (“anchor”) should ensure that public debt remains below the debt ceiling with a high probability even under adverse shocks; a consistent safe deficit level should consider rising spending needs. ### Simulation approach and assumptions - Simulation methodology based on Baum and others (2018) and IMF (2018) calibration approach. - Staff assumptions used in analyses include: - potential growth rate of 5 percent (Box 2 referenced in source); - inflation rate at the 3 percent target; - average effective interest rate of 6 percent for external and domestic debt (in line with the past 10 years); - annual USD/GEL depreciation of 2 percent (in line with the past 10 years). - Simulations assume macroeconomic shocks follow a normal distribution around real GDP growth and primary balance paths under staff medium-term projections, account for the government’s planned FX debt share profile (planned reduction from 73 percent currently to 62 percent by 2026), and include stock-flow adjustments reflecting historical contingent liability realizations. - Alternative distributional assumptions (Student t-distribution with fatter tails) yield much lower safe debt levels, reflecting greater downside risk from large adverse shocks. ### Main simulation findings - Georgia’s current public debt (about 39 percent of GDP) is safe and sustainable under the baseline stochastic simulations: public debt is likely to remain below the debt ceiling of 60 percent of GDP with a high (more than 95 percent) probability. - Simulations indicate a “safe” debt level of 43 percent of GDP corresponding to a roughly 5 percent probability of exceeding the 60 percent debt ceiling; however, this may be optimistic given underestimation of large adverse shocks and other fiscal risks. - Considering pandemic experience (general government debt rose from 40 percent of GDP in 2019 to just above 60 percent of GDP in 2020), contingent liabilities from power purchase agreements, rising costs from extreme weather events, sizeable SOE liabilities and quasi-fiscal activities, and PPP commitments, a prudent safe debt level would be around 40 percent of GDP. ### Safe deficit range consistent with a 40 percent debt anchor - A safe deficit range consistent with stabilizing debt at the “safe” 40 percent of GDP: 2–2.5 percent of GDP depending on additional spending pressures (aging, climate). - Under plausible macroeconomic assumptions, an overall deficit of 2.5 percent of GDP would need to be maintained in the long run to stabilize public debt at 40 percent of GDP, assuming no additional spending pressures related to aging or climate. - Accounting for additional spending pressures requires upfront fiscal effort to build buffers while observing the deficit ceiling of 3 percent of GDP. - Considering the next 10 years and depending on incremental costs (e.g., between zero and 0.1 percent of GDP increase per year in additional age-related spending), the required initial deficit level would range between 2.2 and 2.5 percent of GDP to maintain debt below 40 percent of GDP and the same level of public service delivery within the deficit ceiling of 3 percent of GDP. - Including climate-related additional costs of 0.5 percent of GDP in the next decade would reduce the required deficit level further to 2 percent of GDP. - Illustrative incremental cost estimates cited: about 0.5 percent of GDP increase over the coming decade for aging-related health expenditure (2022 Fiscal Risk Statement) and staff estimates of about 0.6 percent of GDP increase for basic pension spending over the same period. ### Policy implications and recommendations - Medium-term fiscal targets should complement the fiscal rule by aiming for a “safe” debt anchor around 40 percent of GDP and maintaining an overall deficit in the 2–2.5 percent of GDP range (adjusted for aging and climate pressures). - To create fiscal space for planned infrastructure investments and to accommodate additional spending needs, further revenue mobilization will be needed. - Current staff projections assume a gradual decline in debt via modest fiscal adjustment and a gradual winding down of capital spending; this may leave some margin for additional spending but is insufficient to accommodate large public investments and potentially significant contingent liabilities without further adjustments in current spending (e.g., social benefits). - Large-scale infrastructure projects under consideration, and their fiscal implications, pose significant risks to the medium-term fiscal path and call for additional revenue measures or offsetting adjustments. _Annex prepared by Jiae Yoo (FAD) and Elif Ture (MCD); simulation methodology based on Baum and others (2018)._ ### 5. The NBG has been a proactive user of MPP tools. Most of the MPP tools in Georgia are ### 1geoea2024001 - 5. The NBG has been a proactive user of MPP tools. Most of the MPP tools in Georgia are ### Macroprudential Policy in Georgia – Recent Developments - The NBG started using MPP tools in 1992 when a minimum reserve requirement ratio was introduced. - At the initial stage, MPP tools focused on liquidity and capital requirements; since 2017 they have also focused on de-dollarization. - In recent years, borrower-based tools, mainly payment to income (PTI) and loan to value (LTV) limits, have been increasingly used to slow credit growth and, when differentiated by currency or residency, to reduce dollarization. - During the COVID-19 pandemic (mid-2020), systemic buffers were partly released: - Capital conservation buffer (CCB) lowered from 2.5 to 0 percent. - Part of the Pillar 2 buffer (2/3 of the currency induced credit risk (CICR) buffer) was eliminated, with an implied capital release of about 1.4 percent. - The liquidity coverage ratio (LCR) requirement for local currency was suspended on May 1, 2020, for one year. - Reserve requirements on foreign currency were relaxed. - Banks were not allowed to pay out dividends and bonuses or buy back shares. - Since 2022, macroprudential policy has focused on: - Rebuilding systemic buffers. - Mitigating the effect of tight monetary policy on dollarization. - Reducing risks associated with surging migrant and financial inflows following the war in Ukraine and their potential reversal. ### Rebuilding Systemic Buffers - Banks fully restored pre-pandemic capital buffers and are required to build an additional neutral counter-cyclical buffer (CCyB). - Restoration timeline and compliance: - Banks were required to restore conservation buffers by January 1, 2024; all 15 banks met the requirement by September 2023. - Banks were required to restore CICR buffers by January 1, 2023; all banks complied. - CCyB: - March 2023: NBG announced a cycle-neutral positive CCyB at 1 percent. - Compliance requirement modified (announced on November 29, 2023): increment set at 0.25 percent each year, ultimately reaching 1 percent by March 2027. - Table 2 (summary of capital requirements in 2024) highlights: - Two largest banks subject to higher Pillar 1 capital buffers: - Capital conservation buffer: 2.5% - Systemic bank buffer: 2.5% - Banks subject to neutral countercyclical buffer: 1% announced; 0.25% in place as of March 2024 - Banks subject to Pillar 2 buffers (Q4, 2023): [5.1% - 18.1%] - Historical and structural capital requirements: - Before June 2014: 8% of RWA for Tier 1 capital; 12% of RWA for total regulatory capital - From June 2014 (Pillar 1): 7% (4.5%+2.5%) of RWA for CET 1; 8.5% (6%+2.5%) of RWA for Tier 1; 10.5% (8%+2.5%) of RWA for total regulatory capital - From December 2017: Pillar 2 capital requirements implemented with phase-ins for Pillar 2 and systemic risk buffers - From March 2020: supervisory measures due to COVID-19 released Conservation capital buffer (2.5%) and part of Pillar 2 capital requirements (around 1.5%) - From January 2023: transition to IFRS from local GAAP and a new Pillar 2 requirement: Credit Risk Adjustment buffer around 2.7% - Besides capital adequacy requirements, a requirement for minimum regulatory capital remains. ### Credit, Deposits, and Recent Trends - Credit-to-GDP ratio: - After declining steadily in 2022, the credit-to-GDP ratio rose in 2023 and currently stands just above its pre-pandemic level. - Exchange rate and deposit inflows: - Following the war in Ukraine, both nominal and real exchange rates appreciated sharply. - Banks experienced surging deposits, mainly from non-residents migrating to Georgia and returning Georgians. - Credit drivers and macroprudential focus: - Demand for housing increased, leading to rising housing prices and rents. - Credit growth was largely driven by consumer loans. - Macroprudential policy has prioritized de-dollarization, building liquidity buffers, limiting housing sector risks, and preventing further household debt vulnerabilities. ### Continuing De-dollarization (Time-varying MPP tools) - Main instruments used by the NBG to reduce dollarization: - Outright ban on FX lending for unhedged borrowers for amounts below specified GEL thresholds: - Raised from GEL 200,000 to GEL 300,000 effective January 1, 2024, and further to GEL 400,000 from May 1, 2024. - NBG will further limit FX lending for unhedged borrowers by increasing this floor gradually. - Higher capital charges on unhedged FX lending: - CICRs for unhedged foreign currency loans were recalibrated and increased on January 1, 2024, for more dollarized loan portfolios. - Currency-differentiated borrower-based measures: - Payment-to-income (PTI) limits: - If monthly income < GEL 1000: PTI is 20% for FX loans; and 25% for GEL loans, or if the loan and income are in the same currency. - If monthly income > GEL 1000: PTI is 30% for FX loans; and 50% for GEL loans, or if the loan and income are in the same currency. - The income threshold was increased from GEL 1000 to GEL 1500 on April 1, 2022. - Loan-to-value (LTV) limits: - 85% for GEL loans and 75% for FX loans. - Limits on loan maturity: - 20 years for mortgage loan in GEL or FX mortgage loans of fully hedged borrowers. - 10 years for FX mortgage loans of unhedged borrowers (lowered from 15 years on January 1, 2022). - 10 years for consumer loans secured by the real estate. - 6 years for transport loans (except business loan). - 4 years for all other consumer loans (reduced from 4 to 3 years on August 15, 2022, and increased back to 4 years on November 1, 2023). - Higher reserve requirements (RR) and penalty rates of remuneration on FX versus GEL deposits, and differentiation of RR by individual banks’ deposit dollarization: - RR for macroprudential purposes (10%–15% effective July 16, 2021, previously 15%) based on deposit dollarization is applied to borrowed funds in foreign exchange with remaining maturity from one to two years. - If deposit dollarization is 70% or above, RR is 15%; if deposit dollarization is 40% or below – RR is 10%; in between it changes linearly based on dollarization. - Zero-remuneration rate on banks’ required reserves at the NBG for their foreign currency liabilities (introduced in 2022). - Differentiated liquidity coverage requirements for FX and GEL deposits. - Residency-based differentiation: - Higher liquidity requirements for sharply rising non-resident Russian deposits effective September 1, 2022, by assuming higher outflow rates than other non-resident deposits. - This measure was reversed in February 2024 after the share of these deposits in total non-resident deposits stabilized in 2023. ### Effectiveness and Limitations of De-dollarization Measures - MPP has helped strengthen resilience against large exchange rate shocks, but its contribution to de-dollarization is hard to measure: - Dollarization has been on a declining trend since 2010, likely driven by structural changes. - Many measures have multiple objectives (limiting leverage, ensuring liquidity, reducing FX balance sheet risks), complicating empirical attribution to individual tools. - International experience suggests sustainable de-dollarization requires stronger macroeconomic policy frameworks supporting stable growth and low inflation. ### Limiting Large Exposures and Concentration Risks - September 2022 amendments to the “Regulation on the Concentration of Exposures and Large Exposures in Commercial Banks” implemented FSAP recommendations: - Limits that commercial banks shall adhere to specified in Article 4 “Limits and Restrictions on Exposures”. - A guideline on identification of a group of connected clients developed. - Compliance and outcomes: - All banks currently comply with NBG requirements and have large exposures below the regulatory limit of 25 percent of CET capital. - NBG monitoring and data collection over recent two years show no significant changes over time, largely driven by the large banks. - NBG attributed limited change to: banks adjusting exposures earlier, prudent internal limits, and some banks having no large corporate lending. - New regulation viewed as crucial to prevent potential future risk build-up. ### Reducing Household Sector Risks - Household vulnerabilities: - Household debt-to-GDP ratio has fallen slightly since 2021 but remains close to 40 percent of GDP. - Consumer lending has driven overall household credit growth and tends to have higher lending rates. - Household credit dollarization has declined steadily since 2017, but a significant share of borrowers remain unhedged and exposed to currency risk. - Large lari appreciation driven by surging inflows underlines risks if inflows reverse. - Key MPP measures for households: - Ban on FC lending to unhedged low-income borrowers with threshold increases: - Ban floor raised from GEL 200,000 to GEL 300,000 on January 1, 2024, and further to GEL 400,000 on May 1, 2024; NBG announced the floor will be gradually increased. - Other measures: - Lowering maximum mortgage maturity from 15 to 10 years. - Stricter PTI requirement (20% for FC loans; and 25% for GEL loans) for a larger group by raising monthly income threshold from GEL 1000 to GEL 1500. - Tightening lending standards and increased risk weights on FC lending. - To limit leakages of PTI and LTV measures, NBG has considered: - Differentiating maximum maturity of consumer lending based on verifiable income. - Widening perimeter of NBG’s supervisory and regulatory powers to cover all credit activities, including by real estate developers. - Impact and stress test findings: - NBG estimates: - Issuance of mortgage loans in FC has declined. - Number of borrowers of FC loans in the banking system portfolio declined from 140,000 at end-2016 to about 37,000 currently. - FC loans amount to GEL 7.2 billion (about 10% of 2022 nominal GDP). - Sensitivity analysis by NBG under severe shocks (including cumulative depreciation of 40 percent over two years and a real income shock similar to 2020): - Households on average would still be able to serve debt. - Low-income borrowers would be very vulnerable: share of households with a PTI ratio at and above 50 percent would increase sharply from 44 to 54 percent. ### Monitoring Corporate Sector Risks - Corporate sector debt dynamics: - Debt-to-GDP ratio of non-financial companies improved considerably over the last two years due to strong nominal GDP growth and lari appreciation. - Bond financing remains fairly small relative to bank financing; foreign financing stable in recent years. - MPP coverage for corporates: - Few MPP tools target the corporate sector; no tools explicitly target FC exposures or industry/sectoral concentrations. - Since 2019, banks required to maintain 30 percent equity on loans to real estate developers. - NBG conducts regular stress tests to monitor companies’ debt servicing capacity and assess financial stability risks. ### Mitigating Housing Sector Risks - Housing market developments: - Housing prices and rents rose sharply after influx of Russian migrants and returning Georgians and surge in money transfers. - Some early evidence suggests the housing “boom” could have ended: resident and non-resident deposits stabilized in 2023. - Growth of housing prices has slowed; real estate transactions lower than a year ago; housing rents modestly declined since mid-2023 but remain above historical trend. - Credit gap remains negative, implying the boom may have been without a credit boom; direct impact on banking system limited. - NBG vigilance: - NBG developed a real estate heat map in 2022 based on ESRB methodology to monitor housing-sector financial stability risks. - Q2 2023 risk map indicated risks related to mortgage growth decreased relative to Q1 2022. ### Managing Potential Policy Leakages and Shadow Banking Risks - Observed leakages as MPP tightened on mortgage/FC lending: - Real estate developers conducting pre-sales directly with buyers, often with nontransparent financial terms and commonly in FC. - These contracts not considered loans and developers do not share information with credit information bureau, leading banks to potentially underestimate borrower indebtedness. - NBG monitoring and assessment: - Direct risk to banking sector currently deemed limited. - NBG collecting information directly from largest developers and indirectly from banks lending to developers. - Most pre-sale contracts are short term and must be paid in full before construction completes. - For developers applying for bank loans, NBG requires 30 percent equity participation and close monitoring of construction phases by banks. - NBG has monitored bond issuances and non-bank funding to developers; found size to be limited so far. - NBG has not decided how to regulate this emerging non-bank sector but is working on initiatives to efficiently collect data for regular monitoring of this part of shadow banking. - Non-banking financing activities under monitoring (not currently regulated or covered by MPP measures; none considered systemic but bringing them into perimeter under consideration): - Leasing, especially of cars: - Banking groups own major leasing companies; NBG exerts indirect pressure not to use loopholes. - Leasing companies share information with credit information bureau; NBG has a database on market size and borrowers’ obligations. - Share of leasing in total financing of private sector is 0.4 percent. - Unregistered private money lenders engaging in real estate backed lending: - “Sale and buy-back” agreements can circumvent regulations; each agreement is registered so NBG has collected data and followed development. - Annually, around 4,000 agreements, amounting to around 8 percent of all bank mortgages. - Activity picked up after tightening of PTI/LTV requirements, suggesting high-risk borrowers moved from banks to this market. - NBG is seeking efficient responses (public awareness, financial literacy); addressed as a consumer protection problem rather than a material shadow banking systemic risk. ### Interactions between Macroprudential Policy and Monetary Policy - NBG macroprudential policy aims to complement monetary policy and address spillovers. - Examples and estimated effects: - Measures introduced to reduce FC loan growth when monetary policy tightened and local currency appreciated (e.g., reduced maturity of FC mortgage loans from 15 to 10 years). - NBG analysis suggests this maturity reduction lowered the annualized monthly growth of FC mortgage loans by 4 percentage points. - The overall impact on credit growth might be smaller (0.2 percent) as borrowers switched to GEL loans. *Source: IMF staff summary of NBG macroprudential measures and outcomes included in the linked chapter.* ### 26. However, in some cases, macroprudential policy has been used for monetary policy ### However, in some cases, macroprudential policy has been used for monetary policy ### Use of macroprudential policy for monetary objectives - Macroprudential policy was sometimes justified as addressing weak monetary policy transmission due to high dollarization (example rationale: a policy rate hike may lead borrowers to switch from domestic to foreign currency loans, thus undermining the monetary policy objective). - Macroprudential tools were used to reduce overall credit demand, with mixed results: - The NBG slowed the growth of unsecured consumer loans by reducing the maturity of consumer credit. - When the NBG tightened lending requirements for floating loans in 2022 by requiring banks to include a 3-percentage point interest rate shock when assessing PTI requirements, the impact on credit growth was negligible. - Assessment: While macroprudential policy tools may have had some countercyclical effects, they should primarily be used to build up resilience against systemic risks and not substitute for monetary policy. ### Conclusions on macroprudential stance and dollarization - The macroprudential policy stance has been appropriately tightened to rebuild systemic buffers released during the COVID pandemic. - A large range of measures have been used to manage surging inflows from Russia and reduce dollarization, but effectiveness is less clear when lending occurs outside the banking system. - Recommendations for the macroprudential toolkit: - Streamline the toolkit to enhance effectiveness. - Make choice and calibration of measures more informed by impact assessments. - Recognize that sustained de-dollarization can only be achieved by strong macroeconomic policies that ensure stable growth and low inflation. - MPP measures should aim at achieving financial stability and avoid substituting for monetary policy. ### Key policy recommendations and implemented/ongoing actions (select highlights from Annex VIII) - Capital and resilience - Banks asked to retain earnings until pandemic-related uncertainties subside and pre-pandemic capital buffers are restored: Implemented. As of end-2023, total capital adequacy ratio is higher at 22.1% than it was before Covid 19. - Basel regulation on banks’ large exposures: Implemented. - Macroprudential policy and dollarization - Review calibration of macroprudential tools aimed at reducing dollarization, including via impact assessments: Ongoing. CICR buffer methodology changed from March 2023; additional risk weights for unhedged exposures now depend on loan dollarization level instead of fixed 75% additional risk weight. - NBG increased the limit to unhedged foreign currency loans from 200 000 GEL to 300,000 GEL starting from January 1, 2024, and further to GEL 400,000 starting from May 1, 2024. NBG will gradually increase this limit in coordination with commercial banks, considering the macroeconomic environment and risks. - Communication of macroprudential policy decisions: Ongoing. Decisions and press releases published on the NBG website on committee meeting days; Financial Stability Report published annually. - Enhance public communication to clarify objectives of FX interventions: Ongoing. NBG developed an FXI Strategy; final draft under management review. - Supervisory and risk practices - GRAPE (General Risk Assessment Program) handbook reviewed, updated, and re-published in 2022: Implemented. - Require systemic banks and encourage others to incorporate internal stress testing in capital and liquidity planning: Implemented. In December 2022, letters sent to four largest banks to submit ICAAP and ILAAP by July 2023; supervisory stress testing conducted in 2023 to determine stress capital buffer under Pillar 2. - AML/CFT and new sectors - Legislative framework for Virtual Assets and Virtual Asset Service Providers became effective on January 1, 2023; registration and AML/CFT supervision for VASPs instituted. In June 2023, NBG decree N94/04 approved rules for VASP registration; in December 2023, decree N253/04 amended rules on information accompanying transfers of funds and VAs. - Financial safety nets and resolution - Bridge Bank playbook created and signed by the Minister of Finance on 3/3/2023 (Decree N118): Ongoing enhancements. - Guidelines on early intervention measures and revocation of banking license signed by Governor on 2/2/2023: Ongoing enhancements to prompt corrective actions. - Financial market infrastructure and capital markets - NBG adopted rules on oversight of payment systems and payment system operators and rules for designation of important payment systems in November 2023: Implemented. - Law of Georgia on Mortgage Covered Bonds adopted by Parliament on November 29, 2022; secondary regulation adopted by NBG on March 15, 2023: Implemented. - Access to finance and fintech - Roadmap for fintech strategy in progress; expected ready by 2024H2. NBG published “financial education national strategy” in January 2023. - Online collateral registry available at national public register website (link provided in source). *Source: Fund staff and the authorities’ self-assessment.* ### Annex IX. Data Issues ### Annex IX. Data Issues ### Data adequacy assessment — overall - Georgia: Data Adequacy Assessment Rating: A - Median Rating (by sector): A A A A B A A - Overall finding: "The data provided to the Fund is adequate for surveillance" (Rating A). ### Detailed questionnaire results — sectoral ratings and data quality characteristics - Sectoral median ratings reported in heatmap: National Accounts A; Prices A; Government Finance Statistics A; External Sector Statistics A; Monetary and Financial Statistics B; Inter-sectoral A. - Government Finance Statistics granularity: top cell A (GO); bottom cell B (Debt). - Monetary and Financial Statistics granularity: top cell A (MFS); bottom cell B (FSI). - Data quality characteristics (selected): - Coverage: A A A A B - Granularity: B (overall); A (GO); B; A (MFS); A (Debt); B (FSI) - Consistency: A A A - Frequency & Timeliness: A A A A A ### Rationale for the assessment and recent changes - General assessment: "In general, the data available are of high quality and timely." - Upgrade rationale: Rating upgraded since the 2021 Article IV consultation due to extensive TA that improved: - National accounts (consistent chain linking of quarterly and annual estimates; better accounting for FISIM). - Price statistics. - Main shortcoming: Monetary and financial sector monitoring — more granular data are provided on financial sector asset breakdowns by instrument and banking sector large exposures upon request, but: - Consistency across financial sector data sources and FSI metadata could be improved. - Changes since last Article IV (2021): Data quality broadly in line with previous consultation and remain high; improvements noted in national accounts and price statistics. ### Corrective actions and capacity development priorities - Two major national accounts priorities: - Institutional sector accounts. - GDP by expenditure at constant prices (both annual and quarterly). - Planned and ongoing support: - IMF staff and Eurostat are expected to provide extensive TA in national accounts. - IMF TA is underway for improving FSI data and metadata. ### Use of non-official data in the Article IV staff report - Corruption perceptions: data sourced from Transparency International. - Vacancy data: sourced from an online jobs board (jobs.ge). ### Remaining data gaps - Staff: "do not see any key data gaps outside of those identified in the questionnaire." ### Data Standards Initiatives and dissemination - Georgia subscribes to the Special Data Dissemination Standard (SDDS) since May 2010 and publishes data on its National Summary Data Page. - The latest SDDS Annual Observance Report is available on the Dissemination Standards Bulletin Board. ### Table of Common Indicators Required for Surveillance (as of April 2024) - The document includes a Table of Common Indicators Required for Surveillance (As of April 2024) covering indicators such as: - International Investment Position - Stocks of Central Government and Central Government-Guaranteed Debt - External Current Account Balance - Exports and Imports of Goods and Services - GDP/GNP - Gross External Debt - Consolidated Balance Sheet of the Banking System - Interest Rates - Consumer Price Index - Revenue, Expenditure, Balance and Composition of Financing — General Government and Central Government - Exchange Rates - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Reserve/Base Money - Broad Money - Central Bank Balance Sheet - Timing and frequency annotations in the table use the following codes: Daily (D), Weekly (W), Monthly (M), Quarterly (Q), Annually (A); Irregular (I); Not Available (NA). *Source: Annex IX. Data Issues (Georgia), IMF staff report materials.* ### 1.6 percentage points. Following the decline in inflation, the NBG began normalizing monetary policy, ### 1.6 percentage points. Following the decline in inflation, the NBG began normalizing monetary policy, ### Monetary policy, FX intervention, and central bank governance - Following the decline in inflation, the NBG began normalizing monetary policy; the policy interest rate is 8.25 and is still somewhat above the NBG’s estimation of the neutral interest rate. - The NBG remains committed to purchasing FX opportunistically, while limiting its FX interventions to specific occasions in which the market liquidity is insufficient to absorb specific large FX purchases by SOEs or the large banks. - The NBG intends to follow a gradual and data-driven approach to further policy rate cuts. - The NBG has implemented most of the recommendations in the 2022 Safeguards Assessment and the authorities are open to further strengthening governance, in accordance with staff’s recommendations, following the October elections. ### Financial sector resilience and macroprudential policy - The banking system is well capitalized, profitable, and liquid with low Non-Performing Loans. - Banks have restored conservation and currency-induced credit risk buffers and are gradually implementing a countercyclical capital buffer. - The two largest banks are listed on the London Stock Exchange, and their shares have peaked recently, following a rapid surge in the last couple of years. - Private sector debt to GDP, notwithstanding its expansion as of the second half of 2023, is well below its 2020 peak and near its pre-pandemic level due to strong growth and the lari appreciation. - The NBG has introduced an array of macroprudential and regulatory measures to mitigate credit-, currency-, and concentration risks. - The NBG’s proactive approach supported a secular decline in dollarization and the NBG remains committed to taking steps to reduce it further while mitigating FX risks to lenders and borrowers. - All but one of the key recommendations of the 2021 Financial System Stability Assessment were implemented or are ongoing. ### Local financial markets, pensions, and capital market development - The amount of locally traded government bonds has rapidly increased over the last decade, while their maturity has lengthened. - Bank loans continue to serve as the main source of financing for corporates, but the maturity of these loans has also increased significantly over the last decade. - The amount of locally traded corporate bonds has increased and so has the share of lari-denominated bonds among them. - Since the adoption of the state pension fund (pillar II) regulatory and supervisory framework in 2018, the assets under management of the local pension funds have grown almost tenfold, and their coverage has increased from 25 to 40 percent of the population, with a much more diverse allocation. - Since 2021, Georgia is an ordinary member of the International Organization of Securities Commissions (IOSCO) and the authorities continue to adopt advanced regulation, in line with international standards and EU Directives, to develop efficient, liquid, and fair capital markets. ### Growth constraints, agriculture, and infrastructure investment - Staff finds that workers’ move from agriculture to more productive sectors explains about a third of output growth in the last 20 years, but Georgia still has a large share of employment in agriculture relative to peers. - Raising agricultural productivity is identified as the best way to raise medium-term growth in Georgia. - Agriculture is dominated by small, low-productivity farms; close to two-thirds of agricultural workers sell less than half of their produce on the market. - Productivity gains have been stalled by low land registration and weak rural land markets; recent marked progress in land registration is underway. - The National Agency of the Public Registry is working to conclude all land registration by the end of the year, enabling trade as well as collateral-based credit. - Infrastructure bottlenecks hamper growth across many sectors, with high transport and logistics costs reflected in high non-tariff trade barriers. - The authorities are dedicating about 8 percent of annual GDP to capital spending to tackle bottlenecks and boost trade, including projects such as the East-West highway, the middle corridor, Anaklia deepwater port, and a Black Sea cable. - The authorities emphasize ambitions to develop Georgia as a regional data exchange hub and a reliable connectivity corridor, using large investments and trade agreements. ### Human capital, energy, and green reforms - Low educational achievements impede growth, especially for the professional services industry, and contribute to still-high unemployment. - Authorities have taken steps to improve teachers’ quality, especially in rural schools, and to improve standardization and supervision of kindergartens and schools. - Efforts are under way to increase vocational training provision and align curricula with private sector skill needs. - Georgia has ample renewable energy production potential and the opportunity to become a major regional energy exporter, including to Europe. - The country must increase hydropower generation capacity to enhance energy independence and reduce its carbon footprint; authorities use auctions within a renewable energy support scheme. - Authorities concur with staff on the need to open the electricity market as soon as feasible. ### Engagement with the Fund and capacity development - Georgia has a strong track record and positive experience with Fund engagements, including through Fund programs, and remains committed to most of the reforms agreed-upon in the current precautionary SBA program. - Consultations between staff and the authorities continue over NBG governance issues and the nature of the required financial supervision of SOEs; authorities concur with staff on the importance of central bank independence and adequate governance and on the necessity of rigorous MOF financial supervision of SOEs to mitigate fiscal risks. - Given political constraints from the election-cycle, authorities believe governance and SOE supervision issues could be addressed following the October elections. - In the last five years, Georgia benefited from a total of 163 Fund Technical Assistance (TA) missions; Sixty percent of these TA missions were led by FAD, facilitating major fiscal reforms by the MOF. - Georgian officials have served as experts in Fund TA missions to other countries; the MOF established LEPL—the academy of the ministry of finance—to provide training in finance, budgeting, accounting, tax, etc., to MOF employees, other government employees, the private sector, and regional peers. - The academy signed a memorandum of understanding (MOU) with the Fund for courses led by top experts from the IMF and Joint Vienna Institute; recently the Fund Institute for Capacity Development (ICD) decided not to extend the MOU due to budget considerations and the Georgian authorities hope the ICD will reconsider. *Source: IMF staff report excerpt.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1geoea2024001.pdf_