## tarea2024024 ## Source details **Canonical URL:** [tarea2024024](https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024024.pdf) ## Other formats - [Markdown version](/-/media/files/publications/tar/2024/english/tarea2024024.pdf.md) - [Structured JSON version](/-/media/files/publications/tar/2024/english/tarea2024024.pdf.json) --- ### Preface — Mission scope and high-level findings - Mission: IMF Fiscal Affairs Department (FAD) mission updated the 2016 Fiscal Transparency Evaluation during April 19 to May 3, 2023. - Mission leader: Isabel Rial. FAD team: Arturo Navarro, Mary Betley, David Gentry, Viera Karolova, Rimantas Veckys. - Principal interlocutors at the Ministry of Finance (MoF): Mr. Giorgi Kakauridze (First Deputy Minister of Finance), Ms. Ekaterine Guntsadze (Deputy Minister), Mr. Mirza Gelashvili (Deputy Minister), and senior MoF staff across multiple departments. - Other meetings: National Bank of Georgia (NBG), National Statistics Office, Parliamentary Budget Office (PBO), State Audit Office (SAO), Ministry of Economy and Sustainable Development, PPP Agency, Ministry of Environmental Protection and Agriculture, Municipality of Tbilisi. - Scope: Update of the 2016 Fiscal Transparency Evaluation focusing on the first three pillars of the Fiscal Transparency Code (excluding Pillar IV). - Aggregate assessment (2023): - Meets good or advanced practices on 27 out of the 36 principles of the Code. - Basic practice on a further 8 principles. - Only one principle not met. - Noted drivers of reform: pensions, public investment management, public corporations, energy sector. - Open Budget Index: Georgia improved from 16th place in 2015 to first place in 2021. ### Major improvements since 2016 (summary) - Fiscal reporting - Inclusion of Legal Entities under Public Law (LEPLs) across fiscal reports. - Publication of central and sub-national governments’ annual consolidated financial statements following IPSAS. - First detailed report on the cost of tax expenditure published. - Publication of revisions to historical data and reconciliation tables to improve data consistency. - Consolidated Annual Financial Statements (AFS) for central government published since 2020; for autonomous republics and municipalities since 2021. - Fiscal forecasting and budgeting - Recalibration and adoption of a new set of fiscal rules. - Publication of alternative macroeconomic scenarios. - Reconciliation and explanation of material changes to previous forecasts. - Fiscal risk analysis and management - Broader coverage and analytical depth of the Fiscal Risks Statement (FRS), notably for SOEs and power-purchase agreements (PPAs). - Extended long-term perspective in Debt Sustainability Analysis (DSA). - NBG published Financial Sector Stability Report. - Quantification of fiscal costs and likelihood of natural disasters. ### Remaining gaps and quantified vulnerabilities (selected) - Net worth underestimation and coverage gaps (2021, percent of GDP): - Unreported expenditure of non-market SOEs: 3.5 percent of GDP. - Unreported expenditure of public corporations: 8.4 percent of GDP. - Gap in valuation of nonfinancial assets: - Government: 30.5 percent of GDP. - Non-market SOEs: 5.5 percent of GDP. - Public corporations: 46.7 percent of GDP. - Reporting gap on the liability side: 14.3 percent of GDP. - Specific stock and flow gaps (end-2021 estimates): - Unreported government assets: 30.5 percent of GDP (including mineral resources: 19.4 percent of GDP; underestimated non-financial assets: at least 7 percent of GDP; underestimated shares and equities: 4.1 percent of GDP). - NPV of pension liabilities from special employment-related pension scheme: 14.3 percent of GDP (not disclosed through regular reporting). - IMF mission NPV estimate of social assistance-related pension payments (Pillar 1): 109 percent of GDP (discussed but not disclosed as government net worth). - Unreported assets of non-market SOEs: 5.7 percent of GDP (non-financial assets: 4.3 percent of GDP; financial assets: 1.4 percent of GDP). - Assets of public corporations: 46.5 percent of GDP; outstanding liabilities other than equity: 37 percent of GDP (end-2021). - Consolidated public sector asset holdings: around 142 percent of GDP; liabilities other than equity: 102.4 percent of GDP; public sector net worth: 39.6 percent of GDP; public sector net financial worth: -50.9 percent of GDP. - Consistency and comparability issues: - No published reconciliation between government financing and debt stock (Stock-Flow-Adjustment). - No published reconciliation between main fiscal aggregates across statistics, accounting, and budget reports. - Differences in 2021 between GFS and budget execution (both cash-based): revenue difference 2.7 percent of GDP; expense difference 2.4 percent of GDP. - External oversight: - SAO audits individual line ministries’ AFS and publishes assessments of annual budget execution reports. - SAO does not audit consolidated AFS of central government; plans exist to audit consolidated general government annual financial statement starting in 2026. - High proportion of adverse audit opinions: nearly 50 percent of audited central government budgetary organizations received adverse opinions. - Credibility of forecasts and budgets: - Could be strengthened by publishing ex-post analysis of forecast errors with breakdowns distinguishing new policies’ impact versus macroeconomic changes. - Fiscal risk disclosure limits: - Need to better capture low probability/high fiscal impact events (e.g., government support to financial sector under extreme stress). - Continued monitoring of PPAs and long-term energy contracts. - Sustained management of fiscal risk from public corporations during reform. - Capacity of sub-national governments to repay on-lending should be monitored. --- ### Pillar I — Fiscal reporting: detailed findings and recommendations H3: Changes in ratings (Pillar I, 2016 → 2023) - Coverage - 1.1.1 Coverage of Institutions: Basic → Good - 1.1.2 Coverage of Stocks: Good → Good - 1.1.3 Coverage of Flows: Basic → Good - 1.1.4 Coverage of Tax Expenditure: Not Met → Good - Frequency and Timelines - 1.2.1 Frequency of In-Year Reporting: Advanced → Advanced - 1.2.2 Timeliness of Annual Financial Statements: Advanced → Advanced - Quality - 1.3.1 Classification: Advanced → Advanced - 1.3.2 Internal Consistency: Basic → Good - 1.3.3 Historical Consistency: Not Met → Basic - Integrity - 1.4.1 Statistical Integrity: Good → Basic - 1.4.2 External Audit: Basic → Basic - 1.4.3 Comparability of Fiscal Data: Basic → Basic H3: Coverage of Institutions (1.1.1) — status and key statistics - Total public sector units: 4,086. - Subsector counts (as given): - Central government: 2,583 units (168 budgetary units; 2,415 extra-budgetary units including LEPL, NNLEs, Deposit Guarantee Fund). - Local governments: 1,097 units (110 budgetary units; 987 LEPLs and NNLEs). - Non-market SOEs: 352 units (202 central government controlled; 150 local governments). - Public nonfinancial corporations: 52 corporations (40 state controlled; 12 local government controlled). - Public financial corporations: 2 (National Bank of Georgia (NBG) and Pension Fund). - Table 1.4 fiscal shares (Percent of GDP): - Public Sector: Number of entities 4,086; Revenue 34.9; Expenditure 39.9; Balance -5.0; Intra-PS expenditure 39.9; Net expenditure 100.0 - General government: Number of entities 4,032; Revenue 30.9; Expenditure 36.5; Balance -5.7; Intra-PS expenditure 1.1; Net expenditure 35.5; Percent of total 88.9 - Central government: Number of entities 2,583; Revenue 27.6; Expenditure 33.3; Balance -5.8; Intra-PS expenditure 5.2; Net expenditure 28.1; Percent of total 70.5 - Budgetary Central gov.: Number of entities 168; Revenue 24.0; Expenditure 29.9; Balance -5.9; Intra-PS expenditure 9.9; Net expenditure 20.0; Percent of total 50.3 - Extra-budgetary units: Number of entities 2,415; Revenue 8.2; Expenditure 8.1; Balance 0.1; Intra-PS expenditure 0.0; Net expenditure 8.1; Percent of total 20.3 - Local governments: Number of entities 1,097; Revenue 5.3; Expenditure 5.2; Balance 0.0; Intra-PS expenditure 1.3; Net expenditure 3.9; Percent of total 9.8 - Non-market SOEs: Number of entities 352; Revenue 3.5; Expenditure 3.5; Balance 0.1; Intra-PS expenditure 0.0; Net expenditure 3.5; Percent of total 8.7 - Nonfinancial public corp.: Number of entities 52; Revenue 4.2; Expenditure 4.1; Balance 6.0; Intra-PS expenditure 0.0; Net expenditure 4.1; Percent of total 10.4 - Financial public corp.: Number of entities 2; Revenue 0.8; Expenditure 0.3; Balance 0.5; Intra-PS expenditure 0.0; Net expenditure 0.3; Percent of total 0.7 - Aggregate findings: - Public sector expenditure estimated at 39.9 percent of GDP in 2021. - General government expenditure consolidated: 35.5 percent of GDP in 2021 (of which 80 percent central government; 11 percent local governments; 9 percent non-market SOEs). - Public corporations’ expenditure: 4.4 percent of GDP (about 10 percent of total public sector expenditure). - Coverage expansions and gaps: - Budget execution reports and financial statements now cover about 80.2 percent of total public sector spending. - GFS reporting omits schools and kindergartens (expenditure of 1.7 percent of GDP). - Inclusion of LEPLs and NNLEs since 2016 added expenditure of 8.1 percent of GDP and revenue of 5.3 percent of GDP in 2021. - MoF identified 352 non-market enterprises to be consolidated within general government and 52 market producers classified as non-financial public corporations. - Recommended sequencing: - Priority: consolidate non-market SOEs within general government (unreported expenditure 3.5 percent of GDP in 2021). - Next: expand coverage to include public corporations (unreported expenditure 4.1 percent of GDP in 2021). - MoF maintains database of annual financial statements for SOEs and updated Budget Code to transfer non-market SOEs to the State Treasury by 2026; interim reporting by special decree. H3: Coverage of Stocks (1.1.2) — status and quantified balances - IPSAS-based consolidated financial statements for central government since 2021 (24 accrual-based IPSAS standards); autonomous republics and municipalities similarly prepare consolidated statements. - Remaining stock coverage gaps (end-2021 estimates): - Government assets: unreported assets 30.5 percent of GDP (mineral resources 19.4 percent of GDP; underestimated non-financial assets at least 7 percent of GDP; underestimated shares/equities 4.1 percent of GDP). - Government liabilities: NPV pension liabilities special groups 14.3 percent of GDP in 2021 (not disclosed regularly). - Unreported assets of non-market SOEs: 5.7 percent of GDP (non-financial assets 4.3 percent; financial assets 1.4 percent). - Public corporations assets: 46.5 percent of GDP; liabilities other than equity: 37 percent of GDP. - NBG holdings: financial assets 30.3 percent of GDP; financial liabilities 25.7 percent of GDP. - Aggregate public sector balance sheet (end-2021): - Consolidated public sector assets: around 142 percent of GDP. - Consolidated public sector liabilities other than equity: 102.4 percent of GDP. - Public sector net worth: 39.6 percent of GDP. - Public sector net financial worth: -50.9 percent of GDP. - Main components: nonfinancial assets 90.5 percent of GDP; financial assets 51.5 percent of GDP; liabilities other than equity 102.4 percent of GDP (includes general government debt in loans and debt securities of 51 percent of GDP; NBG currency reserves of 17 percent of GDP; pension liabilities of civil servants scheme 14.3 percent of GDP; defined-contribution Pension Fund 3.4 percent of GDP). - Recommended action: address remaining gaps and expand balance sheet coverage to the public sector. H3: Coverage of Flows (1.1.3) — status and priorities - Current reporting: cash flows, cash revenue, accrued revenue and expenditure, financing, and limited other economic flows included in IPSAS-based consolidated financial statements (central government since 2021). - Significant remaining gap: tax revenue recorded on a cash basis in all fiscal reports. - Improvements since 2016: - Treatment of payments associated with previous years’ invoices revised to record arrears payments as expenditure in cash-based reporting. - Gradual IPSAS implementation improved comprehensiveness of flows and stocks for central and local governments. - Priorities: - Move to comprehensive accrual recording of flows, especially taxes. - Accrued tax data should be based on assessments and declarations less amounts unlikely to be collected (per international standards). - Interim: consider time-adjustment cash method as transitional approach. H3: Coverage of Tax Expenditure (1.1.4) — practice and estimates - Tax Expenditure Statement published annually as annex to State budget documentation starting with the 2023 State budget (following 2022 Budget Code amendment). - Tax-expenditure estimates comprise PIT, CIT, DPT and VAT covering more than 90 percent of tax expenditure. - For 2021, total forgone revenue calculated as GEL 2.76 million, or 4.6 percent of GDP. - Estimates published for 2018−22; sectoral analyses for VAT and DPT presented. - Methodology: forgone revenue approach, assumes no behavioral responses or tax administration changes; CIT called “(old) CIT” during transition to DPT. - Recommendation: include forgone revenue analyses in budget preparation guidelines so line ministries consider revenue “lost” when planning budgets. H3: Integrity, auditing, comparability and historical consistency - Statistical integrity: - GFS compiled on GFSM 2014 basis; MoF compiles and reports GFS but no standalone fiscal statistics team exists; compilers have limited capacities and also perform other macro tasks. - Under 2018 Fiscal Transparency Code, scoring downgraded from good to basic due to lack of clear delineation between compilers and users. - External audit: - SAO audits and publishes reviews of individual budgetary units and two SNG consolidated statements; consolidated central government AFS not audited by SAO yet. - Consolidated AFS for central government submitted to SAO on or a few days before July 1 and published upon submission. - High incidence of adverse opinions: nearly 50 percent of central budgetary organizations. - Recommendation: legislate timely audit requirement for consolidated general government annual financial statements and prepare action plan to address systemic audit issues. - Comparability: - MoF maintains internal bridge table between budget execution data and GFS; public reconciliation between fiscal reports not available. - IPSAS financial statements include a “statement of comparison of the budget and actual amounts” but not user-friendly explanations of differences. - Historical revisions: - Major revision of GFS covering 2004−19 published in 2021 to expand coverage (including LEPLs) and revise treatments (repayments of arrears, tax refunds, reclassification); average impact for 2013−19: revenue +3.2 percent of GDP; expenditure +2.9 percent of GDP; fiscal balance +0.3 percent of GDP. - Shortcoming: no published explanatory note detailing reasons and impacts of revisions. H3: Pillar I — Priority recommendations (selected) - Recommendation 1.1: Expand coverage, presentation, and transparency of fiscal reports. - Consolidate non-market SOEs in GFS. - Expand general government balance sheet to include all liabilities and improve valuation of nonfinancial assets. - Incorporate accrued taxes in financial statements; interim use of time-adjusted cash method. - Recommendation 1.2: Strengthen consistency and comparability across fiscal reports. - Publish reconciliation of financing and changes in debt (Stock-Flow-Adjustment). - Publish reconciliation statements between main fiscal aggregates across budget execution, GFS, and financial statements. - Recommendation 1.3: Ensure tax expenditure is reviewed in budget planning. - Require line ministries to incorporate forgone revenue analyses in budget preparation guidelines. - Recommendation 1.4: Strengthen integrity and external oversight. - Establish dedicated GFS team; strengthen legal basis for timely audit of consolidated general government AFS; prepare action plan to address systemic audit issues. --- ### Pillar II — Fiscal forecasting and budgeting: key findings and recommendations H3: Overall assessment and improvements - Georgia maintains strong transparency in forecasting and budgeting supported by legal framework, macroeconomic forecasting, and MTBF. - Since 2016, ratings improved for four principles; LEPLs added to budget documentation and credibility improved by disclosing forecast reconciliations between vintages. H3: Comprehensiveness and budget unity (2.1) - Budget documents include all gross revenue, expenditure, and financing of general government entities except non-market SOEs (non-market SOE expenditure ~3.5 percent of GDP). - No extrabudgetary entities or social security fund. - LEPLs included since 2016; majority included in TSA since 2018; transition of remaining LEPLs and NNLEs to TSA begun early 2023 and expected complete by end-2024. - MoF plans to include non-market SOEs in TSA by 2026. H3: Macroeconomic forecast (2.1.2) - Assessment: Advanced. - Government publishes a four-year forecast at least twice a year (Basic Data and Directions Document). - Three alternative macroeconomic scenarios: baseline, optimistic, pessimistic. - Forecast performance (real GDP, 2012−2019): - Average real GDP forecast errors: first year 0,4 percent; second year 1.4 percent; third year 2 percent. - Covid-19: first-year forecast errors reached about 12 percent in 2020; real GDP recovered faster than forecasts in 2021 and 2022. - Inflation forecasts: pre-Covid pessimistic bias; during Covid actual inflation higher than forecasts. H3: Medium-term budget framework (2.1.3) - MTBF in place since 2004; MoF implemented new BDD annex in 2021 on baseline and new policy expenditure. - Forecast performance: - 2012−2019: revenue outturns higher than planned by 0.1 percent of GDP on average; expenditure outturns lower than planned by 0.2 percent of GDP on average. - Forecast errors increase with horizon; two outer years averaged <0.5 percent of GDP; third outer year almost doubled. - 2020−22: average revisions second-year 11 percent; third-year 14 percent (pandemic-related). H3: Investment projects and PIM (2.1.4) - Total obligations of multiyear projects disclosed; procurement competitive but not all projects appraised. - Major projects defined as cost > GEL 20 million; PIM Methodology defines financially significant as > GEL 5 million. - Appraisals for projects costing over GEL 5 million published as annex, but appraisals not always completed before budget approval. - Example: 2023 project “Tourism Infrastructure Improvement Measures” cost GEL 600 million and does not identify individual structures. - Total value of 8 budget projects with multiple capital purchases in 2023: GEL 2.14 billion; total 2023 capital budget: GEL 3.88 billion. - Table 2.3 (new major budget projects total cost > GEL 20 million): - 2021: 7 total; primarily donor funded: 6; contain one or multiple capital purchases: 3 one; 4 multiple purchases. - 2022: 2 total; primarily donor funded: 2; contain one or multiple capital purchases: 2 one. - 2023: 9 total; primarily donor funded: 5; contain one or multiple capital purchases: 1 one; 8 multiple purchases. - Recommendation 2.1: Ensure appraisal of all major components within a single budget project before approval; require cost of any component expected to cost more than GEL 5 million to be presented and appraised. H3: Orderliness, legislation and timeliness (2.2) - Fiscal Legislation (2.2.1): Assessment Advanced — legal framework defines timetable and requirements; Budget Code strengthened to codify expanded content including tax expenditure analyses and FRS. - Timeliness of Budget Documents (2.2.2): Good — draft annual budget bill submitted at least three months before fiscal year; approval and publication within one month of year start; government adherence to timelines documented (2018−2023 dates provided). H3: Policy orientation, participation and credibility (2.3 & 2.4) - Fiscal Policy Objectives (2.3.1): Good — numerical objectives reported; measurement of compliance with deficit rule incomplete. - Fiscal rules in ELA: deficit -3.0 percent of GDP; gross debt 60.0 percent of GDP. - Table 2.5 — Compliance with Fiscal Rules (unified budget) (In percent of GDP): - Target: Deficit -3.0; Actual Deficit: 2018 -0.7; 2019 -2.6; 2020 -9.0; 2021 -6.2; 2022 -2.1; 2023 (planned) -2.8 - Non-compliance: 2018 0.0; 2019 0.0; 2020 6.0; 2021 3.2; 2022 0.0; 2023 0.0 - Target: Debt 60.0; Actual Debt: 2018 38.9; 2019 41.2; 2020 61.0; 2021 50.3; 2022 40.3; 2023 38.8 - Non-compliance (debt): 2018 0.0; 2019 0.0; 2020 1.0; 2021 0.0; 2022 0.0; 2023 0.0 - Measurement gap: rules cannot be measured accurately because budget execution reports omit non-market SOEs. - Performance Information (2.3.2): Good — targets for outputs included; e-Budget being expanded. - Public Participation (2.3.3): Basic — Citizens’ Guide published; no formal central-level mandate for public participation; budget transparency portal underused and contains broken links. - Independent Evaluation (2.4.1): Good — PBO produces independent forecasts and analyses; ex-post forecast error assessments have been one-off and not regular. - Recommendations (selected): - Recommendation 2.2: Improve public understanding and participation; broaden dissemination and institutionalize structured opportunities. - Recommendation 2.3: Strengthen credibility — publish annual ex-post analysis of forecast errors comparing MoF, NBG, PBO, IMF, World Bank; present fiscal implications of new policies separately from macro changes. - Recommendation 2.4: Clarify limits on executive budget adjustments — prohibit movement of funds from capital to current budgets. --- ### Pillar III — Fiscal risks: overview, progress and recommendations H3: Progress since 2016 and institutional coverage - Improvements: 6 principles improved, 6 unchanged. - DSA horizon extended to ten years; initial long-term sustainability exercises for demographics and climate change. - Monitoring and management of public corporations and PPAs improved and disclosed in MoF Fiscal Risks Statement (FRS). - NBG publishes annual Financial Stability Report since 2019. - Data disclosure on sub-national governments improved; limited progress tightening contingency reserve criteria. H3: FRS expansion and selected gross exposures (selected entries from Table 3.3) - Non-financial Public Sector: - Public Corporation Liabilities: 6.4 (Billions GEL); 10.8 (Percent of GDP); Reporting: FRS - Public Private Partnerships: 0.38 (Billions GEL); 0.6 (Percent of GDP); Reporting: Partly reported in FRS - Power Purchase Agreements: 1.4 (Billions GEL); 2.8 (Percent of GDP); Reporting: FRS - Guarantees issued by CG: 0.003 (Billions GEL); 0.0 (Percent of GDP); Reporting: MoF debt statistics - Financial Sector: - Explicit Exposure to financial sector: 0.0 (Billions GEL); 0.0 (Percent of GDP); Reporting: NBG FSR - Contingent Events: - Natural Disasters: N/A (Billions GEL); N/A (Percent of GDP); Reporting: FRS - Legal Claims: 8.5 (Billions GEL); 14.0 (Percent of GDP); Reporting: FRS - Long-term risks: - IPSGS: 8.5 (Billions GEL); 14.3 (Percent of GDP); Reporting: Not Reported - NPV of Social Assistance Pension Payments: 65.4 (Billions GEL); 109 (Percent of GDP); Reporting: Not Reported - Notes: - Net exposure of PPA as reported in the 2021 FRS; estimated energy market cost 3 percent of GDP in a baseline scenario including PPAs, CfD, FiPs and strategic projects (Namakhvani, Nenskra and Khudon). - Legal claims represent maximum exposure for domestic and international cases; not an acknowledgement of payment. H3: Specific risk areas and findings - Macroeconomic Risks (3.1.1): Advanced — FRS includes probabilistic fan charts and alternative scenarios. - Specific Fiscal Risks (3.1.2): Advanced — FRS estimates overall gross exposure for key risks around 14.1 percent of GDP; PPAs and PCs main sources. - Long-term Fiscal Sustainability (3.1.3): Basic — DSA horizon extended to ten years, but limited full disclosure of long-term pension, health and demographic impacts. - Pension reform (post-2018) long-term cost estimated at no more than 5.2 percent of GDP. - Long-term baseline assumptions in Figure 3.2: inflation= 3 percent; GDP growth = 5 percent; discount rate = 8.7 percent; UN population forecast. - Alternate scenario: inflation = 5 percent; GDP growth = 4 percent; discount rate = 9.0 percent; population growth of 1 percent. - Budgetary Contingencies (3.2.1): Basic — legal reserve funds exist; aggregate limit respected in practice; access criteria vague; 2023 aggregate appropriated for State budget reserve funds 0.3 percent of total expenditure appropriations, compared to 2.6 percent for remaining funds. - Asset and Liability Management (3.2.2): Good — strong liability disclosure; asset-side strategy lacking; on-lending portfolio ~3 percent of GDP published quarterly; limited assessment of repayment capacity and contingency buffers. - Guarantees (3.2.3): Good — guarantees rarely used; as of 2022 one outstanding government guarantee worth GEL 3.3 million (0.01 percent of GDP); methodology to assess likelihood of calls pending. - PPPs and PPAs (3.2.4): Good — PPAs central in energy-related contingent liabilities; 2022 FRS presents NPV cost estimates and scenario analysis. - Box 3.2: 2022 FRS estimates NPV of operating framework cost at 3 percent of GDP baseline and up to 8 percent of GDP in unfavorable scenario; deficit outcomes depend on cost pass-through to tariffs and stabilization fund depletion. - Financial Sector Exposure (3.2.5): Advanced — no explicit government liabilities; deposit insurance scheme introduced 2017 with legal target fund size 6 percent of insured deposits; as of December 2022 GEL 137.8 million accumulated vs insured deposits GEL 5.9 billion. - Financial sector held approximately 60 percent of outstanding domestic government bonds as of December 2022; holdings concentrated in a few banks (over 75 percent market share). - Natural Resources (3.2.6): Not met — mineral volumes published but not valued; mining sector 1.6 percent of national output in 2021 and ~19 percent of goods exports by value; fiscal revenue from mining estimated GEL 71.1 million in 2018. - Environmental Risks (3.2.7): Good — FRS publishes quantitative estimates of fiscal risks from natural disasters; no strategy to address fiscal impacts; NDRRS adopted 2017 covering 2017−20 but not updated or linked to fiscal planning. H3: Sub-national governments and public corporations (3.3) - Sub-national governments (3.3.1): Good — MoF publishes annual budgets, Treasury publishes AFS for autonomous republics and municipalities; on-lending to SNGs ~0.8 percent of GDP end-2022 (down from 1.2 percent in 2021); monitoring recommended to focus on Tbilisi, Batumi, Kutaisi (representing 43 percent of SNG expenditures). - Public Corporations (3.3.2): Good — PCs’ assets ~12.6 percent of GDP; liabilities ~7.8 percent of GDP in 2021; net profit GEL 543 million; ROE 19 percent; subsidies 0.4 percent of GDP; dividends 0.1 percent of GDP; on-lending stock to PCs 4.2 percent of GDP in 2021; Georgian Oil and Gas Corporation QFA estimate GEL 302 million or 0.5 percent of GDP in 2021. - Reforms: PC reform strategy approved 2022; Public Corporation Law drafting with World Bank assistance; expected law finalization by end-2023 and approval in 2024. H3: Pillar III — Priority recommendations (selected) - Recommendation 3.1: Strengthen quantification and disclosure in FRS. - Provide detailed planned policy responses for negative macro scenarios. - Expand FRS coverage to SNGs and financial sector (likelihood and fiscal impact). - Develop long-term sustainability analysis covering pension reform and health sector; strengthen sensitivity analysis. - Standardize PPP/PPAs disclosure (NPV and by-year commitments). - Recommendation 3.2: Tighten criteria for accessing contingency reserves. - Rationalize reserve funds to only those for unforeseen and unavoidable situations. - Publish regulations on establishing/accessing reserve funds, limits on total size, and specific access criteria. - Recommendation 3.3: Enhance fiscal risks monitoring and management. - Adhere to Public Debt Law requirements before new guarantees; develop assessment methodology for guarantees and fees to risk fund. - Monitor largest SNGs, disclose on-lending portfolio, subsidies, and key fiscal indicators; analyze repayment capacity and include in FRS. - Undertake comprehensive fiscal-perspective analysis of financial sector risks (possibly confidential). - Improve asset management, introduce risk spread in on-lending, develop and approve PC ownership policy, prepare crisis response strategy including triggers and financing vehicles. - Update 2017−2020 National Disaster Risk Reduction Strategy and Action Plan and report on achievements. --- ### Cross-cutting numeric highlights and policy priorities (selected exact figures) - Public sector units: 4,086. - Public sector expenditure: 39.9 percent of GDP (2021). - General government consolidated expenditure: 35.5 percent of GDP (2021). - Unreported non-market SOE expenditure: 3.5 percent of GDP (2021). - Unreported public corporation expenditure: 8.4 percent of GDP (2021). - Government unreported assets: 30.5 percent of GDP (end-2021). - NPV pension liabilities (special regime): 14.3 percent of GDP (2021). - IMF mission NPV of social assistance-related pension payments (Pillar 1): 109 percent of GDP. - Consolidated public sector assets: around 142 percent of GDP (end-2021). - Consolidated public sector liabilities other than equity: 102.4 percent of GDP (end-2021). - Public sector net worth: 39.6 percent of GDP (end-2021). - Public sector net financial worth: -50.9 percent of GDP (end-2021). - Tax expenditure (2021): GEL 2.76 million, or 4.6 percent of GDP. - Total value of 8 budget projects with multiple capital purchases in 2023: GEL 2.14 billion; total 2023 capital budget: GEL 3.88 billion. - New major budget projects (2023): 9 total; primarily donor funded: 5; contain one capital purchase: 1; contain multiple purchases: 8. - Fiscal rule targets: Deficit -3.0 percent of GDP; Debt 60.0 percent of GDP. - Actual unified budget deficits: 2018 -0.7; 2019 -2.6; 2020 -9.0; 2021 -6.2; 2022 -2.1; 2023 (planned) -2.8. - Actual debt (% GDP): 2018 38.9; 2019 41.2; 2020 61.0; 2021 50.3; 2022 40.3; 2023 38.8. - Legal claims exposure: 8.5 Billions GEL; 14.0 percent of GDP (2021). - Public Corporation liabilities: 6.4 Billions GEL; 10.8 percent of GDP. - Power Purchase Agreements net exposure: 1.4 Billions GEL; 2.8 percent of GDP. - NPV of social assistance pension payments: 65.4 Billions GEL; 109 percent of GDP. - Deposit insurance fund accumulated (Dec 2022): GEL 137.8 million; insured deposits: GEL 5.9 billion. - Financial sector holding of domestic government bonds (Dec 2022): approximately 60 percent. *Source: Preface and Executive Summary and excerpts from the IMF Technical Report (tarea2024024).* ### Preface ____________________________________________________________________________ 5 ### tarea2024024 - Preface ### Mission scope and participants - IMF Fiscal Affairs Department (FAD) mission updated the 2016 Fiscal Transparency Evaluation during April 19 to May 3, 2023. - Mission leader: Isabel Rial. - FAD team members: Arturo Navarro, Mary Betley, David Gentry, Viera Karolova, Rimantas Veckys. - Principal interlocutors at the Ministry of Finance (MoF) included: Mr. Giorgi Kakauridze (First Deputy Minister of Finance), Ms. Ekaterine Guntsadze (Deputy Minister), Mr. Mirza Gelashvili (Deputy Minister), and senior MoF staff across Macroeconomic Analysis and Fiscal Policy Planning Department, Budget Department, Fiscal Risks Department, Public Debt Management Department, Treasury Service, and Reporting and Methodology Department. - The mission also met representatives of: the National Bank of Georgia (NBG), the National Statistics Office, the Parliamentary Budget Office (PBO), the State Audit Office (SAO), the Ministry of Economy and Sustainable Development, the Public-Private Partnerships (PPP) Agency, the Ministry of Environmental Protection and Agriculture, and the Municipality of Tbilisi. ### Key progress since 2016 - The report updates the 2016 Fiscal Transparency Evaluation (published in 2017) and focuses on the first three pillars of the Fiscal Transparency Code (excluding Pillar IV). - Recognized improvements and reform drivers include pensions, public investment management, public corporations, and the energy sector. - Open Budget Index recognition: Georgia’s ranking improved from 16th place in 2015 to first place in 2021. - Since 2016, improved ratings in 15 of the 36 principles of the Code. - 2023 assessment status: - Meets good or advanced practices on 27 out of the 36 principles of the Code. - Basic practice on a further 8 principles. - Only one principle is not met. ### Notable improvements by pillar - Fiscal reporting - Inclusion of Legal Entities under Public Law (LEPLs) across fiscal reports. - Publication of central and sub-national governments’ annual consolidated financial statements following IPSAS. - Publication of first detailed report on the cost of tax expenditure. - Publication of revisions to historical data and reconciliation tables to improve data consistency. - Consolidated Annual Financial Statements (AFS) for central government published since 2020; for autonomous republics and municipalities since 2021. - Fiscal forecasting and budgeting - Recalibration and adoption of a new set of fiscal rules. - Publication of alternative macroeconomic scenarios. - Reconciliation and explanation of material changes to the government’s previous forecasts. - Fiscal risk analysis and management - Broadened coverage and analytical depth of the Fiscal Risks Statement, notably for SOEs and power-purchase agreements (PPAs). - Extended long-term perspective in the debt sustainability analysis (DSA). - Publication of Financial Sector Stability Report by the NBG. - Quantification of fiscal costs and likelihood of natural disasters. ### Remaining gaps and vulnerabilities - Coverage of fiscal reports and public sector net worth - Net worth is underestimated primarily due to: - Uncovered non-market SOEs and public corporations. - Limited recognition and valuation of nonfinancial assets in the balance sheet. - Quantified gaps (2021, percent of GDP): - Unreported expenditure of non-market SOEs: 3.5 percent of GDP. - Unreported expenditure of public corporations: 8.4 percent of GDP. - Gap in valuation of nonfinancial assets: - Government: 30.5 percent of GDP. - Non-market SOEs: 5.5 percent of GDP. - Public corporations: 46.7 percent of GDP. - Reporting gap on the liability side: 14.3 percent of GDP. - Consistency and comparability of fiscal reports - No published reconciliation between government financing and debt stock. - No published reconciliation between main fiscal aggregates across statistics, accounting, and budget reports. - External oversight - SAO audits annual financial statements of individual line ministries and publishes an assessment of annual budget execution reports. - SAO does not audit consolidated financial statements of the central government; plans exist to audit the consolidated general government annual financial statement starting in 2026. - Credibility of fiscal forecasts and budgets - Could be strengthened by publishing ex-post analysis of forecast errors, including breakdowns showing impact of new policies versus macroeconomic changes. - Fiscal risk quantification and disclosure - Further improvements needed to capture low probability but high fiscal impact events (e.g., potential government support to the financial sector under extreme stress). - Continued close monitoring of PPAs and long-term energy contracts is required, especially in the context of energy reform. - Sustained monitoring and management of fiscal risk from public corporations is needed during public corporation reform. - The capacity of sub-national governments to repay on-lending should be monitored despite lower potential fiscal impact. - Risk management scope - Gradual expansion to cover long-term sources of fiscal risks, including demographic and climate change impacts and the fiscal impact of recent pension reform. - Development of a strategy for managing fiscal impacts of sudden crises (natural or man-made) requiring immediate government response. ### Institutional and reporting enhancements undertaken - Since 2016: - Institutional coverage expanded to include LEPLs and NNLEs in budget reporting. - Treasury introduced IPSAS-based consolidated financial statements for central government and individual local governments in 2021. - Historical GFS time series revised to: - Include LEPLs and NNLEs (except schools and kindergartens). - Develop a general government balance sheet including nonfinancial assets, financial assets, and liabilities from 2019 onwards. - Incorporate further adjustments from improved source data. - MoF compiled a list of public enterprises, reviewed financial results in line with GFSM 2014, identified non-market SOEs, and compiled a pilot GFS for these units. ### Policy priorities and recommendations (high level) - Priority reforms: - Accounting reform, public corporation reform, and energy market reform to increase coverage and disclosure in fiscal reports. - Incorporate non-market SOEs into fiscal reports to move ratings closer to advanced practices. - Publish reconciliations between government financing and debt, and between main fiscal aggregates across reports to improve credibility. - The report presents eleven main recommendations to further strengthen fiscal transparency in Georgia (detailed recommendations are set out under each pillar of the full report). *Source: Preface and Executive Summary of the IMF Technical Report (tarea2024024).* ### 3. Since 2016, the rating on 5 principles of Pillar I of the Code has improved, one has ### 3. Since 2016, the rating on 5 principles of Pillar I of the Code has improved, one has deteriorated, and 6 have remained unchanged (Table 1.2). The improvements in the ratings are discussed below. Since 2016, substantial improvements have been made to fiscal reporting practices, summarized in Table 1.3. ### Summary of changes in ratings (Pillar I, 2016 → 2023) - Coverage - 1.1.1 Coverage of Institutions: Basic → Good - 1.1.2 Coverage of Stocks: Good → Good - 1.1.3 Coverage of Flows: Basic → Good - 1.1.4 Coverage of Tax Expenditure: Not Met → Good - Frequency and Timelines - 1.2.1 Frequency of In-Year Reporting: Advanced → Advanced - 1.2.2 Timeliness of Annual Financial Statements: Advanced → Advanced - Quality - 1.3.1 Classification: Advanced → Advanced - 1.3.2 Internal Consistency: Basic → Good - 1.3.3 Historical Consistency: Not Met → Basic - Integrity - 1.4.1 Statistical Integrity: Good → Basic - 1.4.2 External Audit: Basic → Basic - 1.4.3 Comparability of Fiscal Data: Basic → Basic _Source: IMF staff_ ### Progress on 2016 recommendations (Table 1.3) — key findings - 1.1 Expand institutional coverage of fiscal and statistical reports - Recommendation actions: Include LEPLs in GFS reports; extend accounting reform to local governments; produce an annual consolidated general government financial report. - Progress made: Some progress. - Details: - General government statistics compiled and reported in line with GFS 2014 for each subsector and consolidated. - LEPLs and NNLEs included in budget execution reports, financial statements, Treasury, and GFS reports (GFS excludes schools and kindergartens). - MoF produces annual consolidated financial statements for central government and for individual municipalities in line with accrual-based IPSASs (24 standards). - Autonomous republics and municipalities producing annual consolidated financial statements in line with 24 accrual-based IPSASs. - Central government, autonomous republics and municipalities are not consolidated into a general government consolidated annual financial statement. - 1.2 Enhance quality of fiscal reporting - Recommendation actions: Revise treatment of payment of previous years’ invoices; expand coverage of central government balance sheet; publish reconciliation of changes in net financing and stock of government debt; reconcile main fiscal aggregates across reports. - Progress made: Some progress. - Details: - Treatment of previous years’ invoices revised. - Balance sheet expanded to cover consolidated general government, including improvements in coverage of financial leasing and concessions. - Inventory and valuation process for state non-financial assets not completed. - No reconciliation of changes in the stock of debt and net financing available. - Financial statements include a table showing some differences between budget execution and cash-flow statement, but not a user-friendly reconciliation. - 1.3 Strengthen integrity of fiscal reports (SAO audits) - Recommendation actions: Require State Audit Office (SAO) to audit annual financial statements and provide a formal opinion on the annual budget execution report. - Progress made: Limited progress. - Details: - From 2021, consolidated financial statements for central government prepared on 24 accrual-based IPSAS and published on the Treasury’s website, but not audited by the SAO. - 1.4 Enhance reporting and control over tax expenditure - Recommendation actions: Publish an estimate of revenue forgone from tax expenditure in the budget documentation. - Progress made: Good progress. - Details: - Starting 2022, a Tax Expenditure Assessment Report is published as an annex to the draft State budget package, with detailed analysis of estimated forgone tax revenue. _Source: IMF staff_ ### 1.1 Coverage of Fiscal Reports — 1.1.1 Coverage of Institutions (Good, Improved from Basic in 2016) - Public sector composition and counts - Total public sector units: 4,086 - Subsector breakdown (as given): - Central government: 2,583 units (168 budgetary units; 2,415 extra-budgetary units including LEPL, NNLEs, Deposit Guarantee Fund) - Local governments: 1,097 units (110 budgetary units; 987 LEPLs and NNLEs) - Non-market SOEs: 352 units (202 central government controlled; 150 local governments) - Public nonfinancial corporations: 52 corporations (40 state controlled; 12 local government controlled) - Public financial corporations: 2 (National Bank of Georgia (NBG) and Pension Fund) - Table 1.4 key fiscal shares (Percent of GDP) - Public Sector: Number of entities 4,086; Revenue 34.9; Expenditure 39.9; Balance -5.0; Intra-PS expenditure 39.9; Net expenditure 100.0 - General government: Number of entities 4,032; Revenue 30.9; Expenditure 36.5; Balance -5.7; Intra-PS expenditure 1.1; Net expenditure 35.5; Percent of total 88.9 - Central government: Number of entities 2,583; Revenue 27.6; Expenditure 33.3; Balance -5.8; Intra-PS expenditure 5.2; Net expenditure 28.1; Percent of total 70.5 - Budgetary Central gov.: Number of entities 168; Revenue 24.0; Expenditure 29.9; Balance -5.9; Intra-PS expenditure 9.9; Net expenditure 20.0; Percent of total 50.3 - Extra-budgetary units: Number of entities 2,415; Revenue 8.2; Expenditure 8.1; Balance 0.1; Intra-PS expenditure 0.0; Net expenditure 8.1; Percent of total 20.3 - Local governments: Number of entities 1,097; Revenue 5.3; Expenditure 5.2; Balance 0.0; Intra-PS expenditure 1.3; Net expenditure 3.9; Percent of total 9.8 - Non-market SOEs: Number of entities 352; Revenue 3.5; Expenditure 3.5; Balance 0.1; Intra-PS expenditure 0.0; Net expenditure 3.5; Percent of total 8.7 - Nonfinancial public corp.: Number of entities 52; Revenue 4.2; Expenditure 4.1; Balance 6.0; Intra-PS expenditure 0.0; Net expenditure 4.1; Percent of total 10.4 - Financial public corp.: Number of entities 2; Revenue 0.8; Expenditure 0.3; Balance 0.5; Intra-PS expenditure 0.0; Net expenditure 0.3; Percent of total 0.7 - Source for table: GFS, annual financial statements, and IMF staff estimates - Aggregate and distributional findings - Public sector expenditure estimated at 39.9 percent of GDP in 2021. - General government expenditure consolidated: 35.5 percent of GDP in 2021. - Of consolidated general government expenditure: 80 percent central government; 11 percent local governments; 9 percent non-market SOEs. - Public corporations’ expenditure: 4.4 percent of GDP (about 10 percent of total public sector expenditure). - Coverage gaps and recent expansions - Budget execution reports and financial statements expanded coverage beyond general government to include about 80.2 percent of total public sector spending. - GFS reporting omits schools and kindergartens (expenditure of 1.7 percent of GDP). - Inclusion of LEPLs and NNLEs since 2016 added expenditure of 8.1 percent of GDP and revenue of 5.3 percent of GDP in 2021. - MoF identified 352 non-market enterprises to be consolidated within general government and 52 market producers classified as non-financial public corporations. - MoF compiled GFS for non-market SOEs with IMF technical assistance. - Authorities encouraged to harmonize sectorization with GEOSTAT (2008 SNA). - Recommended further actions - Priority: consolidate non-market SOEs within general government (unreported expenditure 3.5 percent of GDP in 2021). - Second step: expand fiscal reporting coverage to include public corporations (unreported expenditure 4.1 percent of GDP in 2021). - MoF maintains database of annual financial statements for market and non-market SOEs and updated Budget Code to transfer non-market SOEs to the State Treasury by 2026. - Interim: quarterly and annual data to be submitted by non-market SOEs under special government decree. ### 1.1.2 Coverage of Stocks (Good, Unchanged from 2016) - Recent improvements - From 2021, Treasury compiles and publishes IPSAS-based consolidated financial statements for central government in accordance with 24 accrual-based IPSAS standards. - Autonomous republics and municipalities prepare consolidated financial statements based on the same 24 accrual-based IPSAS standards. - GFS reporting presents a consolidated general government balance sheet; Treasury introduced adjustments (imputations for concessions, financial leasing; deposits in TSA; reclassification of historical Soviet-era debt to contingent liabilities). - Remaining stock coverage gaps (end-2021 estimates) - Government assets - Estimated unreported assets: 30.5 percent of GDP - Mineral resources: 19.4 percent of GDP - Underestimated non-financial assets: at least 7 percent of GDP - Underestimated shares and equities held by government: 4.1 percent of GDP - Government liabilities - Estimated net present value (NPV) amount of pension liabilities from the employment-related pension scheme for special groups: 14.3 percent of GDP in 2021 (not disclosed through regular reporting) - Note: IMF mission estimated NPV from social assistance-related pension payments (Pillar 1) to be 109 percent of GDP (discussion in footnote; disclosure not part of government net worth estimation but recommended as good practice) - Assets and liabilities of non-market SOEs (not consolidated) - Unreported assets of non-market SOEs: 5.7 percent of GDP in 2021 - Non-financial assets: 4.3 percent of GDP - Financial assets: 1.4 percent of GDP - Liabilities other than equity of these non-market SOEs: 2.9 percent of GDP in 2021 - Assets and liabilities of public corporations (based on available financial statements) - Assets: 46.5 percent of GDP (end-2021) - Outstanding liabilities other than equity: 37 percent of GDP (end-2021) - NBG holdings: financial assets 30.3 percent of GDP; financial liabilities 25.7 percent of GDP - Aggregate public sector balance sheet estimates (end-2021) - Consolidated public sector asset holdings: around 142 percent of GDP - Consolidated public sector liabilities other than equity: 102.4 percent of GDP - Public sector net worth: 39.6 percent of GDP - Public sector net financial worth: -50.9 percent of GDP - Main components: - Nonfinancial assets: 90.5 percent of GDP - Financial assets: 51.5 percent of GDP - Liabilities other than equity: 102.4 percent of GDP (components include general government debt in loans and debt securities of 51 percent of GDP; NBG currency reserves of 17 percent of GDP; pension liabilities of civil servants pension scheme of 14.3 percent of GDP; defined-contribution Pension Fund of 3.4 percent of GDP) - Recommended action - Address remaining gaps and expand balance sheet coverage to the public sector to provide a more comprehensive view of public sector net worth. ### 1.1.3 Coverage of Flows (Good, Improved from Basic in 2016) - Current reporting coverage - Fiscal reports cover cash flows, cash revenue, accrued revenue and expenditure, financing, and limited other economic flows. - Treasury compiles IPSAS-based consolidated financial statements for central government (since 2021); autonomous republics and municipalities prepare IPSAS-based consolidated financial statements. - Financial statements include: (i) cash-flow statement; (ii) statement of operations (accrued revenue and expense); (iii) statement of changes in net assets/equity (limited other economic flows); (iv) balance sheet. - Significant remaining gap: time of recording of tax revenue — taxes still recorded on a cash basis in all fiscal reports. - Improvements since 2016 - Payments associated with previous years’ invoices were previously recorded below-the-line, understating expenditure. - MoF revised treatment: payment of arrears is now recorded as expenditure in cash-based reporting. - Gradual implementation of accounting reform and IPSAS-based consolidated financial statements (from 2021) introduced substantial improvements in comprehensiveness of flows and stocks for central and local governments. - Further improvement priorities - Move to comprehensive accrual recording of flows, particularly taxes (government’s main revenue source). - Accrued tax data should be based on assessments and declarations less amounts unlikely to be collected (per international statistical standards). - Interim option: consider time-adjustment cash method (widely applied by EU countries) as a transitional approach. ### 1.1.4 Coverage of Tax Expenditure (Good, Improved from Not Met in 2016) - Current practice - Government publishes a Tax Expenditure Statement annually as part of State budget documentation, including sectoral estimates. - No legal limits on size of tax expenditures. - Tax expenditure information is not yet reviewed together with expenditure policies during detailed budgetary planning (one of the practices that qualifies for an “Advanced” rating per FTE Handbook). - Recent development - Following 2022 amendment to the Budget Code, the first Tax Expenditure Statement was published as an annex to the 2023 State budget, building on MoF analytical work. _Source: IMF staff_ ### 2018. The estimates presented in the statement comprise personal income tax (PIT), corporate income ### tarea2024024 - 2018. The estimates presented in the statement comprise personal income tax (PIT), corporate income ### Tax-expenditure estimates and coverage - The estimates comprise personal income tax (PIT), corporate income tax (CIT), distributed profit tax (DPT) and VAT, covering more than 90 percent of tax expenditure. - For 2021, total forgone revenue was calculated as GEL 2.76 million, or 4.6 percent of GDP. - Estimates of tax expenditure by sector are published for the four main types of tax expenditure (PIT, CIT, DPT and VAT) for the period 2018−22. - Sectoral analyses for VAT and DPT are presented (referenced as Figure 1.3). - Additional information on policy objectives for each type of tax expenditure is published as an annex. - While estimates of losses from forgone revenue are provided to Parliament alongside expenditure allocations in the budget package, these estimates are not yet an active part of line ministries’ budget planning process. - There are no legal limits on the size of tax expenditure. ### Estimation capacity, methodology, and presentation - Since the 2016 FTE, the MoF developed capacities for estimating forgone revenue losses and published a detailed tax expenditure assessment. - The Macroeconomic Analysis and Fiscal Planning Department (MAFPD), together with the Tax and Customs Policy Department (TCPD), received external technical assistance to develop the estimation methodology, based on forgone revenue. - The authorities compiled an inventory of the tax expenditure in the Tax Code and undertook the analysis. - The estimates published in the annex to the State Budget are shown in GEL and as a share of GDP, with the underlying analyses including calculations by share of total revenue. - CIT is referred in the Statement as “(old) CIT” as it is being phased out, with its replacement by DPT. During the transition period, both types of tax expenditure are in place. - DPT covers distributed profits and dividend withholding taxes. - For CIT and DPT, sectors are defined according to NACE-2. - The applied estimation approach involves comparing the current and benchmark tax treatments for the items in question, assuming no taxpayer behavioral responses and changes in tax administration. ### Policy analysis and recommendations on revenue vs expenditure measures - Key observation: Forgone revenue is potentially lost expenditure for sector budgetary policies and revenue-based policy measures may not be cost-effective compared to expenditure-based policies. - Recommendation: Introduce in the budget preparation guidelines the requirement for line ministries to consider the amount of revenue “lost” from each sector as an integral part of budget planning, indicating the potential size of cost of policy measures provided to the sector. - Expected benefit: Facilitate comparative value-for-money analysis of relative costs and benefits between revenue and expenditure measures. - Complementary action: Use cost-benefit analyses of individual tax expenditure being undertaken by MAFPD as an analytical base for rationalizing tax expenditure. - Illustration referenced: Figure 1.4 (Australia, Distributional Analysis of a Revenue-based Policy Measure) highlights skewed impact of some revenue-based policies towards richer deciles and the potential for better value-for-money with careful targeting of an expenditure-based measure. ### Frequency and timeliness of fiscal reporting - In-year fiscal reports are prepared monthly and quarterly and are published within one month of the reference period. - The required timings for submission to Parliament are set out in the Budget Code; reports are published upon submission. - The MoF publishes cash-based quarterly reports on budget execution on its website, following the same format as the approved budget, including annexes. - The Treasury produces and publishes monthly budget execution reports on its website, presenting expenditure by administrative and program classifications. - The quarterly reports are shown cumulatively, and the fourth quarter report is considered as the annual budget execution (performance) report. - In line with recent amendments to the Budget Code, quarterly budget execution reports include new budget annexes, such as those on tax expenditure and fiscal risks. - Final unaudited consolidated Annual Financial Statements (AFS) for central government are published within six months of the end of the financial year. - Consolidated AFS for central government are consistently submitted to SAO on or a few days before July 1 each year and are published on the Treasury’s website upon submission. - Consolidated AFS, for central and local governments, are prepared according to 24 accrual-based IPSAS standards. - Some LEPLs, NNLEs and other SOEs sectorized as general government currently prepare financial statements according to IFRS standards and are exempt from using IPSAS. ### Quality of fiscal reports — classification and internal consistency - Classification: Administrative, functional, economic, and program classifications are used uniformly by all general government units; economic classification is aligned with GFSM 2014; functional classification follows COFOG. - Internal consistency: Fiscal reports include two of the three internal consistency checks required by the Fiscal Transparency Code: - Reconciliation between above-the-line fiscal balance and below-the-line financing is provided in budget execution and GFS reports. - MoF’s Debt Management Department compiles and publishes data on government’s debt holders; external bilateral and multilateral debt holders published in the Debt Bulletin; holders of domestic debt published broken down by NBG, commercial banks, other residents, and non-residents. Around 90 percent of total domestic debt is held by the NBG and domestic commercial banks. - Missing element: No reporting for the reconciliation of net financing and the change in the stock of government debt (i.e., Stock-Flow-Adjustment). - Illustration: In 2017, the main element increasing Georgian general government debt was financing of the acquisition of financial assets; during 2018−21, the deficit was the main contributor to increasing debt. Holding gains and losses fluctuated between +4.6 to -4 percent of GDP, driven by nominal exchange rate volatility; due to data constraints this item also includes other unidentified factors and possible errors and omissions. ### Historical consistency - In 2021, the MoF carried out and published a major revision of GFS covering 2004−19, submitting revised annual time series of detailed revenue, expenditure, and financing to the IMF and publishing them on the MoF’s website. - Purpose of revision: expand sector coverage of GFS by including LEPLs in line with IMF recommendations. - Other improvements introduced in 2021: moving repayments of arrears from financing to expenditure; recording of tax refunds and tax revenue sharing; reclassification of the stock of historical debt as contingent liabilities. - Impact of the revision (average for 2013−19): historical revisions increased general government’s revenue and expenditure, and improved the fiscal balance by 3.2 percent of GDP, 2.9 of GDP, and 0.3 percent of GDP, respectively. - Shortcoming: No explanations and/or reconciliations of the significant changes that affected historical fiscal data have been published; good practice requires publication of an explanatory note detailing reasons and impacts of revisions. ### Integrity of fiscal reports — statistical integrity, external audit, comparability - Statistical integrity: - Government finance statistics are compiled and published by the MoF on a GFSM 2014 basis, in compliance with the IMF’s Special Data Dissemination Standard (SDDS). - The MoF’s Macroeconomic Analysis and Fiscal Policy Planning Department (MAFPPD) compiles and reports GFS; there is currently no standalone fiscal statistics team within the MoF. - GFS compilers have limited capacities and also perform other macroeconomic analysis and fiscal policy tasks. - Under the 2018 Fiscal Transparency Code, more stringent requirements led to a downgrade in scoring from good to basic, reflecting the absence of a clear delineation between statistical data compilers and users. - External audit: - The SAO audits and publishes its review of individual central budgetary units’ and two sub-national governments’ consolidated financial statements. - The consolidated AFS for central government is not yet audited by the SAO; instead the SAO publishes a review of the government’s annual budget execution report, including assessment of reliability of main cash-based parameters. - SAO’s independence is guaranteed by the Constitution, Budget Code and SAO’s Organic Law; amendments strengthened legal independence and clarified purpose. - To date, the SAO has not audited the 2021 consolidated AFS for central government; it audits AFS of individual central budgetary units and two SNGs (Tbilisi and Batumi municipal governments). - Review of financial audits of central government budgetary organizations indicates systemic issues, leading to adverse opinions for nearly 50 percent of them and undermining a “true and fair view” of the consolidated central government financial statements. - Recommendation: Introduce in legislation the requirement for the timely audit of the general government’s annual financial statements (both consolidated general government and individual budgetary organizations). - Comparability of fiscal data: - Budget execution reports are produced on the same basis as fiscal forecasts and budget, but differences across fiscal and statistical reports are not reconciled publicly. - IPSAS-based financial statements include a “statement of comparison of the budget and actual amounts,” which attempts reconciliation but does not clearly explain reasons behind differences in the fiscal balance. - The MoF internally maintains a bridge table between budget execution data and GFS quantifying adjustments to transit to GFSM 2014 methodology; such reconciliation is not publicly available. *Source: IMF | Technical Report (excerpts from the provided content unit).* ### 33. Effective fiscal management and ### tarea2024024 - 33. Effective fiscal management and ### Fiscal reporting: consistency, comparability, and reconciliation - Differences across fiscal reports in 2021 were significant, particularly for aggregated revenue and expense. - When comparing central government data reported in GFS and budget execution for 2021 (both cash-based): - Difference between revenue in 2021 accounted for 2.7 percent of GDP. - Difference between expense in 2021 accounted for 2.4 percent of GDP. - Publishing explanatory information on these differences would enhance credibility and enable appropriate processing of fiscal results. - Good practices call for reconciliations between budget execution, financial statements, and GFS, recognizing different bases, coverage of public units, and methodologies. ### Recommendations to improve fiscal reporting transparency (1.5) - Recommendation 1.1. Expand the coverage, presentation, and transparency of fiscal reports. - Consolidate non-market SOEs in the GFS reports. - Progressively expand coverage of the general government balance sheet to include all liabilities and better reflect the value of nonfinancial assets by completing the inventory of state assets and establishing a process for their valuation. - Incorporate in the financial statements accrued taxes based on assessments and declarations and estimate provisions for the amounts unlikely to be collected. In the meantime, use an alternative statistical method (e.g., time-adjusted cash) to estimate accrued taxes. - Recommendation 1.2. Strengthen consistency and comparability between and within fiscal reports. - Publish reconciliation of financing and changes in debt. - Publish reconciliation statements of the differences between main fiscal aggregates published in various fiscal reports (i.e., budget execution, GFS, and financial statements). - Recommendation 1.3. Ensure that tax expenditure is reviewed as part of revenue and expenditure policies during the budget planning process. - Include in the budget preparation guidelines for spending units the incorporation of analyses of forgone revenue so that the costs of these revenue policy measures are reviewed alongside spending policy measures during budget planning. - Recommendation 1.4. Strengthen the integrity of fiscal reporting and the external oversight of the government’s financial position. - Establish a dedicated GFS team to enhance capacities and professional independence and ensure transparent delineation among the statistical data compilers and the users of the data. - Strengthen the legal basis for the timely audit of the general government’s annual financial statements (for consolidated general government and for individual budgetary organizations). - Prepare an action plan to address the systemic issues in the audits of individual budget entities’ consolidated annual financial statements. ### Key statistics and assessment highlights (Table 1.5) - Coverage of institutions - Assessment: Good — Fiscal reports consolidate general government data including LEPLs. - Importance: High — Expenditure of non-market SOEs and public corporations are excluded from fiscal reporting, accounting for 3.5 and 8.4 percent of GDP in 2021. - Recommendation: #1.1 - Coverage of stocks - Assessment: Good — Fiscal reports cover non-financial and financial assets and liabilities, but incomplete coverage and valuation issues remain. - Importance: High — Unreported government assets of 30.5 percent of GDP and liabilities of 7.1 percent of GDP (civil servants pensions scheme). - Recommendation: #1.1 - Coverage of flows - Assessment: Good — Consolidated IPSAS-based financial statements largely cover cash and accrued revenue and expenditure, and other economic flows. Taxes accounted on a cash basis. - Importance: Medium — Tax revenues represent around 23.5 percent of GDP on an accrual basis. - Recommendation: #1.1 - Coverage of tax expenditure - Assessment: Good — Estimates of forgone revenue are published with the annual budget and include estimates by sector but are not considered during budget planning. - Importance: Medium — Forgone revenues represent around 4.6 percent of GDP. - Recommendation: #1.3 - Frequency of in-year reporting - Assessment: Advanced — Monthly and quarterly budget execution reports are published within 1 month. - Importance: Low — Consistent and transparent monitoring of budget execution takes place during the year. - Timeliness of annual financial statements - Assessment: Advanced — Unaudited annual financial statements for CG are published within 6 months of the end of the financial year. - Importance: Medium — No statutory audit requirement for financial statements; high proportion (50 percent) of adverse opinions to financial statements. - Recommendation: #1.4 - Internal consistency - Assessment: Good — Fiscal reports include reconciliations of the fiscal balance and financing, and debt issued and debt holders. - Importance: High — Differences between net debt issuance and change in debt varied between -4.6 to +4 percent of GDP over 2017-2021. - Recommendation: #1.2 - Historical revisions - Assessment: Basic — A major revision of historical GFS time series performed and published in 2021. - Importance: Medium — Unexplained reasons for revised revenue of 3.2 and expenditure of 2.9 percent of GDP, on average over 2013-2019. - Recommendation: #1.2 - Statistical integrity and external audit - Statistical integrity: Basic — Fiscal statistics are disseminated in accordance with international standards. No clear delineation between compilers and users of fiscal statistics. Importance: Medium. - External Audit: Basic — SAO publishes report on reliability of budget execution report. A significant share of audited FS of budgetary units receives adverse opinions. Importance: High — High rates of adverse opinions on underlying FSs (about 50 percent) prevent a ‘true and fair view’ of the consolidated CG AFS. - Comparability of fiscal data: Basic — Budget execution reports are prepared on the same basis as the budget. Importance: High. ### Fiscal forecasting and budgeting: objectives and performance - Budgets and fiscal forecasts should: - Provide comprehensive information on the government’s fiscal objectives and budgetary plans. - Enhance orderliness in the budget calendar to allow legislative scrutiny before the budget year begins. - Have a clear policy orientation to facilitate policy analysis and accountability. - Be based on credible projections of macroeconomic developments. - Georgia’s overall transparency in fiscal forecasting and budgeting remains strong, supported by a legal framework, macroeconomic forecasting, and a medium-term budget framework (MTBF). - Since 2016, ratings improved for four principles and 8 remain unchanged. LEPLs were added to budget documentation beginning in 2016, improving comprehensiveness and fiscal-rule compliance reporting. Credibility improved by disclosing forecast reconciliations between vintages of main fiscal aggregates as an annex. ### Comprehensiveness and budget unity (2.1) - Budget documentation incorporates all gross revenue, expenditure, and financing of general government entities except non-market SOEs. - Georgia has no extrabudgetary entities or funds (other than non-market SOEs) and no social security fund. - Non-market SOE expenditure represents approximately 3.5 percent of GDP. - All major financing sources are included in budget documents, including regular budget funds, expenditure from own revenue, external loans, and external grants. - LEPLs included in budget documents starting from the 2016 budget; majority of LEPLs and NNLEs were included in the TSA beginning in 2018, with transition of remaining LEPLs and NNLEs to TSA begun in early 2023 and expected to be completed by the end of 2024. - MoF conducted a full sectorization exercise in 2022 and adopted plans to include non-market SOEs in the TSA by 2026. ### Macroeconomic forecast (2.1.2) - Assessment: Advanced — budget documentation provides full explanation of macroeconomic forecasts, drivers, key relationships, and reasons for deviations. - Government publishes a four-year forecast at least twice a year (initial MTBF in May and draft budget in September) in the Basic Data and Directions Document of Georgia (BDD). - Forecast tables include GDP, inflation, exchange rates, current account deficit, underlying assumptions, and 3 years of preceding actual data. - Government produces three alternative macroeconomic scenarios: baseline, optimistic, and pessimistic. - NBG and the Parliamentary Budget Office (PBO) perform alternative macroeconomic forecasts. - Forecast errors and biases: - For real GDP during 2012-2019, forecasts had an optimistic bias; average real GDP forecast errors for the first year were 0,4 percent, for the second and third year forecasting errors were 1.4 percent and 2 percent, respectively. - In 2020, first year Covid-19 forecast errors reached about 12 percent for the first outer year; real GDP recovered faster than forecasts in 2021 and 2022. - For inflation, pre-Covid forecasts showed a pessimistic bias; during Covid actual inflation rates were much higher than forecasts. ### Medium-term budget framework (2.1.3) - MTBF in place since 2004 with outturns for two preceding years and medium-term projections of revenue, expenditure, and financing by economic category at consolidated, state, and local government levels and by program and administrative unit. - Since 2021 MoF implemented a new annex to the BDD providing information on baseline and new policy expenditure. - Forecast performance: - Between 2012 and 2019, revenue outturns were higher than planned revenue for the budget year by an average of 0.1 percent of GDP. - Expenditure outturns were lower than planned expenditure for the budget year by an average of 0.2 percent of GDP. - Forecast errors increase with the time horizon (t, t+1, t+2, t+3); errors for the two outer years averaged less than 0.5 percent of GDP and almost doubled for the third outer year. - Revenue and expenditure forecast errors increased significantly during the Covid-19 pandemic and the supporting spending measures introduced by the government. ### Investment projects (2.1.4) - Total obligations of multiyear projects are disclosed in budget documents; procurement is competitive, but not all projects are appraised. - An annex to the budget states sum of payments made to date, current year budget plan, year-by-year over the medium term, and total obligations for each project. - Major projects are defined as financially significant projects costing more than GEL 20 million. The 2016 PIM Methodology defines a financially significant project as costing more than GEL 5 million. - Appraisals for projects costing over GEL 5 million are published as an annex to the budget. - All externally financed projects are included in budget documentation and budget expenditure reports, including payments made directly by the financing partner to a vendor. - Procurement of major individual public works in 2021 and 2022 used competitive methods; State Procurement Agency Order 13 of 2015 provides criteria and procedures for exemptions from competitive procurement procedures and documents decisions. - Appraisals are not always completed before budget approval. When a major budget project contains more than one capital purchase, individual structures or facilities commonly are not appraised individually. - Example: the 2023 project “Tourism Infrastructure Improvement Measures” for GEL 600 million does not identify individual structures or facilities, some of which could cost more than GEL 20 million. - The total value of the 8 budget projects containing multiple capital purchases in 2023 is GEL *Italic: IMF | Technical Report — content extracted from tarea2024024 - 33. Effective fiscal management and* ### 2.14 billion, compared to the total 2023 capital budget of GEL 3.88 billion. While the total value of these ### Georgia: Public Investment Management, Budget Orderliness, Policy Orientation, and Credibility (excerpt) ### New Major Budget Capital Projects and Public Investment Management - Total value of new major budget projects (noted): 2.14 billion, compared to the total 2023 capital budget of GEL 3.88 billion. - Observation: While the total value of these projects will be spent over multiple years, comparing this total to the amount of money currently available to fund capital projects shows that these projects represent a significant claim on the capital budget for years to come. - Table 2.3 — Total number of new major budget projects (total cost over 20 million GEL): - 2021: 7 total; Of which, primarily and directly donor funded: 6; Of which, contain one or multiple capital purchases: 3 one; 4 multiple purchases - 2022: 2 total; Of which, primarily and directly donor funded: 2; Of which, contain one or multiple capital purchases: 2 one - 2023: 9 total; Of which, primarily and directly donor funded: 5; Of which, contain one or multiple capital purchases: 1 one; 8 multiple purchases - Note: donors indirectly finance some projects through the Municipal Development Fund. - Issue identified: The practice of grouping multiple capital purchases under one budget project represents a loophole in the PIM Methodology and undermines the efficiency of public investment spending. - Recommendation from the text: If budget projects with multiple major capital purchases continue, individual capital purchases expected to cost more than GEL 5 million should be identified, total costs estimated, and appraisals conducted in line with the PIM Methodology applicable to similar stand-alone projects. ### Reforms in PIM and Procurement - MoF adopted a PIM reform framework in 2016. - Transparency highlight: expanding the process for appraising projects before their selection in the budget and publishing the analysis. - Public procurement reforms since 2019 have been driven by alignment with the EU’s procurement standards. - Public Procurement Law amended and approved by Parliament in February 2023, which will take effect in January 2025. - Article 11 of the PIM Methodology allows for multiple donor-funded projects to be consolidated under one appropriation but is silent on whether appraisals are similarly conducted or published in a consolidated manner. ### 2.2 Orderliness — Fiscal Legislation and Timeliness - 2.2.1 Fiscal Legislation (Advanced, Unchanged from 2016) - Georgia’s legal framework defines the budget preparation and approval timetable, and key requirements for the government’s budget (Budget Code Chapter V, Articles 33-40; Article 38). - Article 7: government responsibilities focus on budget preparation, implementation, and reporting; Parliament responsible for budget review and approval. Parliament permitted to revise the draft budget only with government agreement. - The Budget Code defines timing for in-year and annual budget execution reports. - Since the 2016 FTE, fiscal legislation strengthened: codified requirement for expanded content for the State budget, including tax expenditure analyses and a fiscal risks statement (FRS). - 2.2.2 Timeliness of Budget Documents (Good, Unchanged from 2016) - Draft annual budget bill submitted to Parliament and made available to the public at least three months before the beginning of the next fiscal year; approved and published within one month of the coming fiscal year. - Final (third) draft provided to Parliament by the end of November, approval on or before the third Friday in December, and publication within the following week and before the beginning of the new fiscal year. - Government has continued to adhere to legislated requirements for budget submission and approval. - Table 2.4 — Timing of Draft Budget Bill Submission, Approval and Publication, 2018−23 (selected entries): - 2018 budget: Government submission of draft State budget bill to Parliament: 13 Dec 2017; Parliamentary approval of State budget Law: 20 Dec 2017; Publication of draft State budget bill: 26 Sep 2017 (1st submission), 27 Oct 2017 (2nd submission), 29 Nov 2017 (3rd submission) - 2019 Budget: Government submission: 13 Dec 2018; Parliamentary approval: 19 Dec 2018; 1st submission: 25 Sep 2018; 2nd submission: 01 Nov 2018; 3rd submission: 30 Nov 2018 - 2020 Budget: Government submission: 10 Dec 2019; Parliamentary approval: 16 Dec 2019; 1st submission: 30 Sep 2019; 2nd submission: 05 Nov 2019; 3rd submission: 29 Nov 2019 - 2021 Budget: Government submission: 29 Dec 2020; Parliamentary approval: 31 Dec 2020; 1st submission: 25 Sep 2020 / 01 Oct 2020; 2nd submission: 05 Nov 2020; 3rd submission: 30 Nov 2020 - 2022 Budget: Government submission: 17 Dec 2021; Parliamentary approval: 21 Dec 2021; 1st submission: 24 Sep 2021 / 26 Sep 2021; 2nd submission: 05 Nov 2021; 3rd submission: 30 Nov 2021 / 01 Dec 2021 - 2023 Budget: Government submission: 15 Dec 2022; Parliamentary approval: 23 Dec 2022; 1st submission: 30 Sep 2022; 2nd submission: 04 Nov 2022; 3rd submission: 30 Nov 2022 - Assessment: Given the frequent interaction between government and Parliament during the more than three months from initial budget submission to approval, the time for scrutiny is considered to be adequate. ### 2.3 Policy Orientation - 2.3.1 Fiscal Policy Objectives (Good, Improved from Not Met in 2016) - Government states and regularly reports on numerical objectives, but measurement of compliance with the deficit rule is incomplete. - Fiscal rules established in the Economic Liberty Act (ELA): two fiscal rules—budget deficit (3 percent of GDP) and stock of gross debt (60 percent of GDP). - The ELA prescribes conditions for escape clauses and reporting requirements; any planned deviation should be remedied within 3 years, except in certain circumstances. - The budget document includes a medium-term fiscal framework for the budget year plus each of three forward years; forward years are included in the BDD, a non-binding annex. - Table 2.5 — Compliance with Fiscal Rules (unified budget) (In percent of GDP): - Target: Deficit -3.0; Actual Deficit by year: 2018 -0.7; 2019 -2.6; 2020 -9.0; 2021 -6.2; 2022 -2.1; 2023 (planned) -2.8 - Non-compliance: 2018 0.0; 2019 0.0; 2020 6.0; 2021 3.2; 2022 0.0; 2023 0.0 - Target: Debt 60.0; Actual Debt by year: 2018 38.9; 2019 41.2; 2020 61.0; 2021 50.3; 2022 40.3; 2023 38.8 - Non-compliance (debt): 2018 0.0; 2019 0.0; 2020 1.0; 2021 0.0; 2022 0.0; 2023 0.0 - Reforms since 2016: expenditure rule abolished in December 2018 amendment of the ELA; coverage of deficit and debt rules partially expanded to general government. MoF and Parliamentary Budget Office now report compliance annually. - Measurement gap: Adherence to rules cannot be measured accurately because budget execution reports do not include non-market SOEs; budget expenditure reports show expenditure exceeding appropriations by small percentages for each year 2017−21 when donors make payments that exceed budget estimates. - 2.3.2 Performance Information (Good, Unchanged from 2016) - Budget documentation contains targets for, and performance against, outputs but not outcomes of major policy areas. - Performance planning and monitoring introduced in 2012, focusing on outputs and covering all years of the medium-term budget; program budget classification links programs to 12 policy classifiers. - Developments: 2018 performance information expanded to include baseline, targeted possible risks, and possible deviations; 2021 information on new policies included in budget documents. - e-Budget system being expanded to include the 12 priorities to enable strategic-level reporting and drill-down to sub-program performance and funding. - Note: Performance information enhances spending efficiency indirectly but it is difficult to assess its impact on management, resource allocation, or total expenditure. - 2.3.3 Public Participation (Basic, Unchanged from 2016) - Citizens’ Guide published providing accessible description of recent economic and fiscal performance, medium-term prospects, and implications for citizens; also a two-page brochure highlighting main budget parameters. - Few SNGs publish a Citizen’s Guide; PBO publishes citizen-accessible information and infographics. - No formal mandate at central level for public participation as part of budget deliberations; Parliamentary Rules of Procedure do not give a formal voice to citizens or civil society groups during review of the annual budget. - A budget transparency portal established in the last five years includes space for suggestions for the next budget, but very few people have used it over the last three years and the portal contains some broken links. - Recommendations: Increase accessibility of the Citizens’ Guide, improve amount of information more directly relevant to citizens, provide more structured opportunities for participation (e.g., town hall-style meetings) and institutionalize such structured opportunities through legislation and active management. ### 2.4 Credibility — Independent Evaluation - 2.4.1 Independent Evaluation (Good, Unchanged from 2016) - The Parliamentary Budget Office (PBO) independently produces economic and fiscal forecasts but does not regularly perform ex-post reviews of forecasts. - PBO role defined in Parliament Order 1/30/20 of February 3, 2020, and the Rules of Procedure of the Parliament of Georgia. - PBO forecasts are detailed, showing assumptions, rationale, cost drivers, and policy inputs; PBO compares its forecast with MoF’s forecasts and evaluates MoF assumptions. - The NBG regularly issues monetary- and financial stability-related forecasts, each with macroeconomic assumptions. - In 2022, the PBO identified ex-post forecast errors for real and nominal GDP growth rates by comparing forecasts issued in 2017, 2018, and 2019 by itself, MoF, NBG, and IMF; such ex-post assessments were a one-off self-assessment and have not been produced regularly. - PBO regularly produces analyses of the executive’s proposed detailed budget, budget execution, and financial impacts of proposed legislation; all PBO analyses are published. *IMF | Technical Report (excerpt).* ### 66. Since 2016, the PBO publishes an annual assessment of compliance with fiscal rules and ### tarea2024024 - 66. Since 2016, the PBO publishes an annual assessment of compliance with fiscal rules and ### Independent evaluation and Parliamentary Budget Office (PBO) - Since 2016, the PBO publishes an annual assessment of compliance with fiscal rules and has expanded monitoring of budget execution. - An annual assessment of compliance with fiscal rules has been produced starting with the 2020 budget; the analysis covers compliance in the budget year plus the medium-term aggregates included in each budget. - The report is not explicitly mandated in PBO’s legal framework. - Supported by Parliament Order 1/30/20 of 2020, the PBO produces analyses of monthly, quarterly, and annual budget execution reports issued by the MoF. - Ex-post analysis of forecast errors is highlighted as an important tool to evaluate government economic and fiscal forecasts and to identify persistent optimism bias across MoF, PBO, and others. - Scanning the detailed budget for issues identified by the AGO reinforces the authority of both the AGO and PBO. - Parliament Order 1/30/20 prohibits the PBO from making recommendations on budgetary, tax, monetary, and public finance supervision policy; the noted analytical activities do not violate that prohibition. ### Supplementary Budget (Good, Unchanged from 2016) - Constitutional and legal context: - The Constitution states Parliament annually adopts the State Budget Law but does not explicitly state that expenditure or disposal of assets can occur only in accordance with law; there is an implicit understanding that the budget controls spending. - Donor financed expenditure may exceed approved budget amounts based on bi-lateral agreements between a donor and the government. - Caps and floors: - Central government appropriations of the annual budget law serve as a cap on spending but there is no floor. - No rules govern decisions or circumstances leading to substantially less spending than authorized or the need to obtain Parliament’s approval for underspending and associated policy impacts. - Deviations and execution: - Figure 2.5 shows percent change of supplementary budgets plus gross effect of over / under execution using the approved budget as baseline. - The Figure shows implementation is very close to what was approved as measured by expenditure. - Since 2020 supplementary budgets have significantly changed the original approved budget, in part due to the Covid-19 pandemic. - Over expenditure occurs due to donor expenditure that exceeds estimates in the approved budget. - Executive powers to change budget composition: - Reserve/contingency funds are authorized in Article 28 of the Budget Code; funds are not large enough to enable a material change in policy without Parliamentary approval. - Budget Code Article 31 provides rules for re-allocations without prior Parliamentary approval: - Re-allocation between budget units is prohibited. - Re-allocation between programs (within a budget unit) is limited to 5 percent of the spending institution's budget with MoF's consent. - Since capital and current spending can be assigned the same high level program code, this allows shifting between capital and current budgets. - Article 31 authorizes transfers to areas of general state significance; the law is silent on the effect on budgets losing funding. - Identified oversight gaps: - Gap 1: Absence of explicit constitutional or statutory provision that spending and disposal of state assets occur only in accordance with law; legal framework should be adjusted over the medium to long term. - Gap 2: No guidance on addressing underspending (spending less than authorized) and associated allocation/cash decisions; re-allocation rules limit changes to 5 percent of an institution’s budget, not of the program budget, allowing substantial effects in large ministries. - Gap 3: Existing re-allocation rules allow movement of funding between current and capital spending within a single program; given sensitivity of capital projects, consideration should be given to restricting or prohibiting shifts from capital to current budgets. - No material changes to these rules since 2016. ### Forecast Reconciliation (Basic, Improved from Not Met in 2016) - Disclosure practice: - Beginning in the 2018 budget, authorities disclose in an annex the reconciliation of successive vintages of government revenue, expenditure (current and capital), deficit, and financing. - The annex discusses changes in main macroeconomic variables, changes in key assumptions raised from global instability, and other factors. - The annex does not distinguish fiscal implications of new policies from the impact of changes in macroeconomic variables. - Revisions and forecast errors: - During 2012−19, the average of the revisions to the second- and third-year expenditure were 1.7 percent and 1.4 percent, respectively. - From 2020 onwards, expenditure plans have been revised upwards due to the pandemic. - The average revisions during 2020−22 were 11 percent and 14 percent for second and third year, respectively. - Credibility improvements suggested: - Reconciliation budget annex should distinguish impact of new policy initiatives from impact of changes in macroeconomic variables. - Over time, annex could include breakdown of effects of individual policy changes, macroeconomic determinants, and other factors such as technical and accounting adjustments. - Table 2.6 presents an indicative reconciliation table for expenditure (as an illustrative format). ### Recommendations (from Section 2.5) - Recommendation 2.1. Ensure appraisal of all major components contained within a single budget project before the budget is approved. - Require that the cost of any component expected to cost more than GEL 5 million is presented. - Appraise each component that reaches the cost thresholds contained in the PIM Methodology as if it were a stand-alone project. - Recommendation 2.2. Improve public understanding and participation in the budget process. - Streamline the main Citizens’ Guide to the budget and increase information provided on implications for a typical citizen. - Broaden dissemination forms of the Citizens’ Guide to reach as many citizens and civil society groups as possible. - Provide more structured opportunities for public participation in the budget process. - Recommendation 2.3. Strengthen the credibility of fiscal forecasts and budgets. - Publish annual ex-post analysis of forecast errors comparing all agencies publishing forecasts: MoF, NBG, PBO, IMF, and World Bank. - Improve transparency of fiscal reconciliation data through presentation of fiscal implications of new policies separately from the impact of changes in macroeconomic indicators. - Recommendation 2.4. Clarify limits on the executive to adjust the budget without prior Parliamentary approval. - Prohibit movement of funds from capital to current budgets. ### Summary evaluation highlights and numeric findings (selected) - Non-market SOEs represent 3.5 percent of GDP. - Real GDP forecasting error for 2022 is 4 percent (noted as pessimistic). - 8 out of 9 new projects in 2023 budget contain multiple unidentified capital purchases. - Average revisions of medium-term expenditure plans: - 2012−19: second-year 1.7 percent; third-year 1.4 percent. - 2020−22: second-year 11 percent; third-year 14 percent. - Table excerpts and assessments reference institutional ratings (e.g., “Good”, “Advanced”, “Basic”, “Not met”) and link recommendations #1.1, #2.1, #2.2, #2.3, #2.4 to findings. ### Fiscal risks: overview and progress since 2016 - The assessment uses three dimensions of the IMF’s Fiscal Transparency Code: - Disclosure and analysis of fiscal risks. - Management of risks from specific sources (government contingencies and guarantees, PPP, financial sector). - Coordination of fiscal relations between central government, local governments, and public corporations (PCs). - Progress since 2016: - Rating of 6 principles improved, 6 remained unchanged. - DSA horizon extended to a ten-year period and initial long-term sustainability exercises undertaken to assess impact of demographics and climate change. - Monitoring and managing of PCs, particularly in the energy sector including fiscal implications of PPAs, have steadily improved and are disclosed in the MoF Fiscal Risks Statement (FRS). - NBG has published the annual Financial Stability Report since 2019. - Data disclosure by the MoF on sub-national governments has improved. - Limited progress achieved in tightening criteria for drawing on budget contingency provisions. - Table 3.1 summary (principles and status highlights): - 3.1.1 Macroeconomic Risks: Advanced → Advanced - 3.1.2 Specific Fiscal Risks: Advanced → Advanced - 3.1.3 Long-term Fiscal Sustainability Analysis: Not met → Basic - 3.2.1 Budgetary Contingencies: Basic → Basic - 3.2.4 Public Private Partnerships: Not met → Good - 3.2.5 Financial Sector Exposure: Good → Advanced - 3.2.7 Environmental Risks: Basic → Good - 3.3.1 Sub-National Governments: Not met → Good - 3.3.2 Public Corporations: Basic → Good ### Progress on 2016 recommendations (Table 3.2 select items) - 3.1 Publish long-term sustainability analysis: Good progress. DSA extended to ten-year horizon and initial long-term sustainability exercises undertaken to assess impact of climate change and pension fiscal costs. - 3.2 Tighten criteria for drawing on budget contingency provisions: Limited progress. Criteria not amended to ensure only unforeseeable or unavoidable expenses are funded through the Presidential and Government Reserve Funds. Appropriations to the Highlands Settlement Development Fund started in 2016. - 3.3 Strengthen controls on contingent liabilities: Good progress. FRS discloses and assesses contingent liabilities from PPA, PCs, quasi-fiscal activities, and legal claims; qualitative and historical analysis of pension and natural disasters presented. - 3.4 Improve reporting on SNGs: Some progress. Increased availability of information on the budget balance of SNGs and the on-lending portfolio. ### Macroeconomic Risks (Advanced, Unchanged from 2016) - The FRS annex to the budget includes detailed analysis and quantification of alternative macroeconomic scenarios (baseline, optimistic, pessimistic). - FRS identifies risks from prior periods and their realization, and new risks for the medium-term forecast period (pandemic impact, global tourism, decrease in global trade turnover, regional risks). - Since 2017, FRS includes probabilistic fan charts for GDP growth, inflation, revenue, and fiscal balance. - No significant changes introduced to macroeconomic risk analysis since the previous evaluation. ### Specific Risks (Advanced, Unchanged from 2016) - Main specific risks disclosed in the FRS, with estimates of magnitude and likelihood and descriptions of policies to manage them. - The financial health of public corporations (PCs) and potential claims from power purchase agreements (PPA) are identified as main sources of fiscal risks. - Coverage and complexity of assessment improved across FRS vintages, allowing estimation that overall gross exposure for these sources of fiscal risks account for around 14.1 percent of GDP. - For PPAs, scenario analysis of potential fiscal impacts of the energy support scheme is presented using different macroeconomic and policy assumptions. - For PCs, the 2022 FRS estimates quasi-fiscal activities undertaken by three key PCs create an estimated loss of 0.6 percent of GDP in 2021. *Source: IMF staff, as presented in the supplied content unit.* ### 80. The coverage of the FRS has gradually increased to include a wider range of issues and ### tarea2024024 - 80. The coverage of the FRS has gradually increased to include a wider range of issues and ### Expansion of Fiscal Risk Statement (FRS) coverage and key findings - The coverage of the FRS has gradually increased to include a wider range of issues and provide a longer-term perspective of risks to fiscal forecasts. - 2022 FRS initial analyses and inclusions: - Initial analysis of potential fiscal impact from legal claims against the state, by size and court of jurisdiction. - Claims presented in local courts represent approximately one percent of GDP in 2021 and are mainly related to contested expropriations and to the execution of procurement contracts. - Potential fiscal impact from claims in international courts is estimated at a maximum of 13 percent of GDP in 2021 and is mostly linked to the implementation of large infrastructure projects. - Fiscal risks arising from natural disasters and climate change, including a detailed description of past trends, were introduced for the first time in the 2022 FRS. - Within long-term sustainability, the 2022 FRS describes expected evolution of health and pension costs and dependence on macro and demographic assumptions. ### Selected specific fiscal risks — gross exposure (Table 3.3 entries) - Non-financial Public Sector - Public Corporation Liabilities: 6.4 (Billions GEL); 10.8 (Percent of GDP); Reporting: FRS - Public Private Partnerships: 0.38 (Billions GEL); 0.6 (Percent of GDP); Reporting: Partly reported in FRS - Power Purchase Agreements: 1.4 (Billions GEL); 2.8 (Percent of GDP); Reporting: FRS - Guarantees issued by CG: 0.003 (Billions GEL); 0.0 (Percent of GDP); Reporting: MoF debt statistics - Financial Sector - Explicit Exposure to financial sector: 0.0 (Billions GEL); 0.0 (Percent of GDP); Reporting: NBG FSR - Contingent Events - Natural Disasters: N/A (Billions GEL); N/A (Percent of GDP); Reporting: FRS - Legal Claims: 8.5 (Billions GEL); 14.0 (Percent of GDP); Reporting: FRS - Long-term risks - IPSGS: 8.5 (Billions GEL); 14.3 (Percent of GDP); Reporting: Not Reported - NPV of Social Assistance Pension Payments: 65.4 (Billions GEL); 109 (Percent of GDP); Reporting: Not Reported - Notes from table: - Net exposure of PPA as reported in the 2021 FRS. The estimated cost of the energy market is estimated at 3 percent of GDP in a baseline scenario that includes PPAs, contract for differences (CfD), feed-in-premiums (FiPs) and strategic projects – Namakhvani, Nenskra and Khudon. Total cost to the government is contingent on price evolution and pass through to tariffs. - The 2022 FRS presents a graphical estimation of potential fiscal costs under different climate scenarios, but it is not possible to determine an exact number of the expected impact. - Legal claims represent the maximum exposure for cases in both domestic and international courts; this does not represent an acknowledgement that these amounts will be paid. - NPV entry refers to implicit obligations—NPV—of the government social assistance-related pensions payable from the state budget. ### Recommendations to enhance disclosure and forward-looking analysis - Expand FRS coverage to disclose risks related to SNGs and the financial sector. - Disclose information on all sources of specific risks in a single report, even when fiscal impact is not material and/or probability is low (see Institution 3.2.5 and 3.3.1). - Take a more forward-looking approach in some cases and reduce descriptive focus on past trends; consider a separate document or Annex for forward-looking analysis. ### Long-term Fiscal Sustainability Analysis (institution 3.1.3) - Current practice and gaps: - Government publishes a debt sustainability analysis (DSA) and is developing a long-term perspective. - DSA estimates a ten-year path of public debt and sensitivity to multiple macro and fiscal assumption changes. - DSA allows assessment of likelihood that fiscal rules (i.e.,60 percent of GDP) are breached. - An analysis of impact of pension, social assistance, and health payments due to changing long-term demographics and entitlements is not presented in full. - 2022 FRS provides initial assessment of social security payments and climate change–related expenditure for fiscal sustainability but is limited. - Improvements since 2016: - DSA horizon extended from seven to ten years. - Exercise assumes shocks to baseline forecast of macro and fiscal variables (e.g., interest rate and primary balance) to forecast public debt trends. - 2022 FRS discusses factors driving future health expenses, noting an increase from 5 to 13 percent of general government expenditure between 2002 and 2021. - Long-term pension trends used to support the 2018 reform were presented. - 2022 FRS discussed potential fiscal impacts of climate change on debt sustainability. - Pension reform and long-term costs: - Post-2018 pension system is based on three pillars: - (i) basic pillar: pension payments indexed and fully funded by the government; - (ii) second pillar: fully funded by employee, government, and employer contributions; - (iii) third pillar: supplementary and voluntary, fully funded by the employee. - 2022 FRS recognizes main risks arise from the basic pillar where indexation to inflation and GDP are sources of volatility in fiscal cost. - Current estimates set the long-term cost at no more than 5.2 percent of GDP. - Implicit contingencies in other pillars could be analyzed from a fiscal risk perspective. - Demographics and sensitivity analysis: - UN population forecasts highlight a declining population with a higher dependency rate. - NPV estimates of government payments to Pillars I and II and special pension regimes show sensitivity to macro assumptions. - Long-term baseline assumptions in Figure 3.2: inflation= 3 percent; GDP growth = 5 percent; discount rate = 8.7 percent; UN population forecast. - Alternate scenario assumptions: inflation = 5 percent; GDP growth = 4 percent; discount rate = 9.0 percent; population growth of 1 percent. - Recommendation: - Include impact of the 2018 pension reform and expected demographic changes, with sensitivity analysis to macroeconomic and fiscal assumptions, to reach higher transparency. ### Risk Management — Budgetary Contingencies (institution 3.2.1) - Legal framework and reserve funds: - Budget Code provides for: (i) Reserve Fund of the President; (ii) Government's Reserve Fund; (iii) two reserve funds of a contingent and development nature; and (iv) a reserve fund, developmental in type, established under separate law. - The first two State budget reserve funds have an aggregate limit of 1 percent of total appropriations in the annual budget; in practice, this limit is respected. - Annual allocations for each reserve fund are set out in separate budget lines. - In the 2023 budget, the aggregate amount appropriated for the State budget reserve funds was 0.3 percent of total expenditure appropriations, compared to 2.6 percent for the remaining funds. - Requests for use of reserve funds are managed by the MoF and approved by governmental decree. - Note: of the two State budget reserve funds, only the Reserve Fund of the Government has been allocated resources in recent years; the Reserve Fund of the President has not had budgetary appropriations for the last four years. - Management practices and weaknesses: - Since 2016, no specific access criteria for reserve funds introduced; number of reserve funds has increased. - Budget Code’s only general criterion for accessing State Budget Reserve Funds is to “finance unforeseen spending.” - Lack of specific criteria has led to use of resources for foreseeable and non-urgent activities (examples in 2022 budget: Independence Day celebrations, a new wine festival, second round of elections). - Recommendations: - Use State Budget Reserve Funds only for unforeseeable and unavoidable situations; establish regulations with specific access criteria consistent with such situations. - Reclassify developmental reserve funds as policy programs with planned budgetary resources. - Codify rules for establishing and accessing reserve funds, including statutory limits on their size. ### Asset and Liability Management (institution 3.2.2) - Legal and institutional arrangements: - Public Debt Law (PDL) covers all public borrowing, assigns accountability to the MoF, defines limits and uses of loans, and ensures recording and disclosure. - Transactions on non-financial assets guided by Law on State Property or PPP Law. - Disclosure stronger on liability side through periodic debt bulletins by MoF. - MoF publishes on-lending portfolio quarterly. - A DSA and a debt strategy covering a four-year horizon are published annually; a parallel asset-side strategy is lacking. - Progress and remaining gaps: - Improvements concentrated on liability side: fiscal rules on debt, more detailed debt bulletins, strengthened DSA. - On the asset side: - TSA coverage increased and active cash management implemented. - On-lending portfolio of approximately 3 percent of GDP is published quarterly; beneficiaries mainly public corporations and SNGs. - Limited analysis on health of on-lending portfolio, including repayment capacity assessments or contingency buffer for renegotiations. - FRS has evidenced low profitability of public corporations: average return on equity of 1 percent for public corporations versus 8 percent for similar private initiatives (discussed in the 2022 FRS). - MoF assessed corporate governance weaknesses and approved a public corporation reform strategy including development of an ownership policy. - FRS disclosed fiscal costs and contingencies of PPAs; energy market reform underway. - Recommendation: - Complete reform processes to ensure better coordination of asset and liability management. ### Guarantees (institution 3.2.3) - Legal framework and disclosure: - PDL gives MoF right to issue guarantees with President’s consent, requires recording in the National Public Debt Register, periodic reporting on outstanding stock, and assessment of likelihood of guarantees being called. - Annual quotas for debt and guarantees defined in annual budget law; process for guarantees to be granted specified. - PDL requires MoF to assess risk from issuing a guarantee to determine resources to be deposited in a risk fund. - Current exposure and practice: - Guarantees have seldom been used in past two decades. - As of 2022, only one government guarantee outstanding worth GEL 3.3 million (0.01 percent of GDP) granted in 1998 and assessed to have negligible risk of being called. - Low stock aligns with implicit government policy that no new guarantees should be issued. - No standardized guarantee schemes have been issued. - A methodology to assess likelihood of guarantees being called, as required by PDL, has not been developed. - Deposit Insurance System: - Created in 2017 via Law of Georgia on Deposit Insurance System; administered by Deposit Insurance Agency which administers the Insurance Fund. - No explicit government guarantee to the system or the fund; system funded through member contributions, insurance premiums, and investment revenue which cover operations. - Recommendations for FRS improvements: - Highlight limited government exposure to explicit guarantees. - Disclose stock of explicit guarantees and likelihood of being called, broken down by categories (e.g., loans, project guarantees). - Assess the Partnership Fund commitment highlighted in the 2021 FRS. - Assess when deposit insurance fund resources will reach 6 percent of insured deposits (legal target) and implications of changes in insured deposit values. - Analyze conditions under which government support could be needed for these schemes. *IMF | Technical Report — Excerpt from the supplied content unit* ### 96. Most government’s PPP liabilities and related spending are disclosed in the annual FRS ### 96. Most government’s PPP liabilities and related spending are disclosed in the annual FRS ### PPP disclosure, coverage, and legal framework - Georgia’s PPP portfolio is mainly comprised by PPAs, under which the government has a firm commitment to purchase energy production at a fixed price over a fixed period. - The government does not provide support to PPPs through on-lending, nor does it control financial institutions that provide financing to PPP operators. - The 2022 FRS includes an estimation of the government’s net and gross exposure to PPAs under alternative macro fiscal scenarios, including assumptions on the ongoing reform in the energy sector. - Disclosure of information on PPAs has been gradually improving since 2017, but authorities publish limited information on other PPPs. - The MoF has no information on the airport’s PPP contract, which undermines its fiscal risks management function. The analysis of Nenskra PPP in the 2022 FRS was pending the results of an audit. - According to the 2018 amendment to the ELA Act and the 2018 PPP Law, new PPPs should be included in both the fiscal deficit and debt rules, and accounted in the government’s balance sheet following as per IPSAS accrual basis. - Putting a PPP on the government’s balance sheet means that: - (i) the private partner’s investment spending counts as government spending; - (ii) the project is recorded as an asset on the government’s balance sheet; and - (iii) the government also records a liability initially equal to the value of the asset. ### Recent improvements and implementation gaps - Since 2016, information on PPAs’ fiscal implications has been gradually disclosed in the FRS, including future service payments and contract provisions representing contingent liabilities for government. - The FRS presents a detailed analysis of the proposed electricity market structure and identifies key parameters and policies (e.g., market price, pass-through to consumer price) underpinning the expected value of government contributions (Box 3.2). - The role of the MoF in monitoring and managing fiscal implications of PPPs was strengthened by the 2018 PPP Law and supporting regulation. - Specific stages on project preparation and implementation, including gateways for project review by the MoF and other government entities, were defined. - The MoF’s fiscal assessment of PPPs should inform the government’s decision to proceed with or request amendments to a proposal. - Since the approval of the PPP law, no new PPPs have been approved, so full implementation of the new framework is still pending. ### Box 3.2 — Georgia’s Energy Reform and Support Framework (summary of characteristics and FRS estimates) - Reform commitments and objectives: - Georgia committed to the deregulation of the electricity market in line with the EU’ regulations for the energy sector. - Authorities expect to reduce fiscal risks related to electricity generation and to pursue a more targeted approach to supporting vulnerable households. - The reform and the new framework should help reduce fiscal risks related to electricity generation and distribution, and properly manage contingent liabilities of the government by introducing a revenue sharing mechanism with energy producers. - Characteristics of the new framework: - PPAs would be gradually replaced by two types of contracts: contracts for differences (CfDs) and feed-in-prices (FiP), which should improve risk sharing between the government and investors. - A regulated market will continue for households and the territory of Abkhazia. - A stabilization fund will be created that is to be replenished/spent when market prices are above/below CfD and regulated prices. - Any shortfall will be covered by the state budget. - 2022 FRS quantitative estimates and scenarios: - The 2022 FRS estimates the net present value of the cost of operating framework at 3 percent of GDP in the baseline scenario and as much as 8 percent of GDP in an unfavorable combination of prices and demand from regulated markets. - Depending on the cost pass through to final tariffs, the system can move from being balanced – 100 percent pass through – to having a deficit of 3.9 percent of GDP – 54.5 pass through – that would be covered by the stabilization fund, or the state budget if the fund is fully depleted. - Note on contract design: - In CfDs the government will pay/receive the difference between the contract and market price and in FiPs the government will pay an additional fee per unit of energy. ### Transparency level and recommendations for PPPs - Fully implementing the approved regulatory framework and increasing the coverage of the FRS would place Georgia in an “advanced” level of transparency with respect to PPPs. - Improved information and disclosure on the legacy PPPs are necessary conditions for this change to be possible. - Considerations to improve presentation and usability of FRS: - Streamline existing information included in the FRS. - Simplify the assessment in the core text and develop detailed annexes for specific risks. - Standardize existing tables and make the analysis more user friendly for a non-expert audience. - The announcement of new projects that could be procured as PPPs, such as the Anaklia Deep-Sea Port, will test the role of the MoF in the PPP process, and the transparency of the new framework. --- ### 3.2.5. Financial Sector Exposure (Advanced, Improved from Good in 2016) ### Key findings on exposures and reporting - There are no explicit government liabilities with the financial sector. - The government has no equity in commercial banks, and it does not provide guarantees to the banking sector. - Government liabilities with the financial sector are mostly limited to Treasury bills and notes held by financial institutions for investment purposes. - The NBG prepares and publishes an annual financial stability report that provides a detailed analysis of the health of the financial system, including main vulnerabilities, stress testing, and policy recommendations. - A deposit insurance guarantee scheme was introduced in 2017, funded through the contributions of financial institutions, and with no explicit guarantees from the government. - The target size of the fund is six percent of the insured deposits. - As of December 2022, GEL 137.8 million have been accumulated, while insured deposits were GEL 5.9 billion. ### Enhanced transparency and stress-testing - Transparency on fiscal exposure to the financial sector was strengthened with the annual publication of the financial stability report since 2019. - The report describes evolution of key financial health indicators (liquidity, solvency, non-performing loans), resilience to sectoral shocks, and includes a consolidated sector-level stress test estimating potential losses and assessing capital adequacy. - Annual reports published by the Deposit Insurance Agency disclose the resources accumulated in the fund and the total amount of insured deposits. ### Recent performance and structural features - The financial sector in Georgia continues to recover from the impact of the pandemic amid the spillovers of the ongoing Russian war in Ukraine. - Key indicators rebounded from lows in 2020, with capital ratios being above the regulatory thresholds set by the NBG. - Asset quality and profitability register a favorable trend and lessen the likelihood of emergence of fiscal risks. - The dollarization of the financial sector is high by international standards, although the authorities have been able to reduce it over the last decade. ### Important quantitative exposures and risk-management gaps - As of December 2022, the financial sector held approximately 60 percent of outstanding domestic government bonds. - Holdings are concentrated in a few banks, which account for over 75 percent of assets and liabilities in the sector. - The 2022 FSR addresses market concentration by looking at its impact on competition, but not from standpoint of its fiscal implications. - It is important for the government to assess the coverage of the deposit insurance scheme on a regular basis under different macroeconomic scenarios. - A better understanding by government of the resources potentially needed in a crisis event is warranted and would be beneficial for designing a risk mitigation and management strategy. - Given the moral hazard implications from disclosing such an analysis, it is not expected such an analysis is published, but it should be within the scope of the work done by the MoF. --- ### 3.2.6. Natural Resource Stocks and Flows (Not met, Unchanged from 2016) ### Disclosure and institutional arrangements - The government publishes the volume of mineral assets but not their value, and it does not disclose the production, sales value, or fiscal revenue from mineral assets in the previous year. - Georgia is not a resource rich country, and does not belong to the Extractive Industries Transparency Initiative. - Sub-soil mineral resources are the property of the state. - The National Agency for Mineral Resources (NAMR), part of the MoESD, oversees the mining industry. - NAMR has compiled an inventory of the size, type, and location of mineral deposits, but the deposits are not valued at current market prices. - NAMR issues mining licenses, maintains the mining cadaster, carries out mining inspection, and monitors annual production levels but does not publish the information. - Fiscal revenue arises from fees, license auctions, and royalties from these activities, but they are not separately identified in the BDD. ### Ongoing reform and mining activity - NAMR is conducting a multiyear reform of the mining sector including: - preparing a new sector strategy, - compiling information on specific mining opportunities, - conducting a marketing campaign to attract investors, - conducting auctions for licenses, and - issuing licenses. - Under the program to date: - 378 license sites were announced, - 69 auctions were held, and - 541 licenses for mineral extraction were issued. - The legal and regulatory framework is being updated with support from the European Bank for Reconstruction and Development. ### Economic and fiscal significance - The mining sector accounted for 1.6 percent of national output in 2021 and approximately 19 percent of goods exports by value. - Fiscal revenue from mining was estimated to be 71.1 million GEL in 2018. - Mining production is economically important but not fiscally significant in Georgia. --- ### 3.2.7. Environmental Risks (Good, Improved from Basic in 2016) ### Disaster risk disclosure and analysis - The government publishes quantitative estimates of fiscal risks from natural disasters based on historical experience but does not have a strategy to address fiscal impacts of disasters. - Major natural disaster risks: earthquakes, floods, and landslides. - The MoF’s FRS provides information on the cost of the 2002 earthquake and the 2015 Tbilisi flood. - The FRS adds probabilities of such events occurring using EM-DAT and estimates costs for these events based on severity and historical experience in Georgia. ### Institutional frameworks and gaps - A strategy for managing crises and disasters has been developed: - Under the National Security Council, the National Crisis Management System was developed to prevent risk, respond, and rapidly recover from natural and man-made disasters. - The NSC adopted the National Disaster Risk Reduction Strategy (NDRRS) and related inter-ministerial Action Plan. - The Action Plan is detailed, addresses damage from a variety of natural events, and is managed by the State Security and Crisis Management Council. - Funding for natural disasters is available through reserve funds, but amounts appropriated annually are limited. - The FRS includes disaster risk beginning from the 2021 budget, and the NDRRS was adopted by government in 2017, covering the period 2017−20. ### Fiscal aspects missing from disaster planning - The NDRRS and its 2017−20 Action Plan do not address the fiscal impact of damage or the financing of response to a disaster. - The Action Plan mentions the MoF only in relation to customs collection at borders. - From the perspective of fiscal risk, the NDRRS and Action Plan are not effective. - An update to the 2017−20 NDRRS and its Action Plan have not been published, nor has a report on implementation of the 2017−20 Action Plan. - Recommendation: The NDRRS and associated Action Plan should be updated to include fiscal impacts of disaster management. --- ### 3.3.1. Sub-National Governments (Good, Improved from Not Met in 2016) ### Reporting and transparency - The MoF publishes the annual budget of each SNG and autonomous region; the Treasury publishes the annual financial statements of Autonomous Republics and Municipalities. - The Budget Code and the Law on Local Self-Government require SNGs to submit financial information to the MoF on a quarterly basis. - Information on approved budgets, their execution, and brief description of results is published at the municipal level, with varying degrees of detail. - The PBO prepares and publishes a descriptive report on the execution of SNGs. - Although a detailed and consolidated analysis of SNG financial performance is lacking, risks are not significant due to the sector’s relatively small size. - The sum of all negative budget balances in 2020 represented only 0.39 percent of GDP, when revenues were significantly affected by the pandemic. ### Fiscal rules, controls, and limits - Controls on borrowing by SNGs have been strengthened, requiring MoF approval for new loans and/or guarantees. - The 2018 ELA included SNG debt within the 60 percent of GDP ceiling. - Article 100 of the Organic Law of Georgia on the Local Self-Government Code links SNGs’ debt levels with their repayment capacity: - New loans taken by SNGs, including LEPLs under their control, should not exceed 10 percent of their annual own revenue, on average over a three-year period. - Inclusion of SNGs in the TSA has enhanced the control and monitoring capacity of the Treasury. ### Fiscal risks and on-lending exposure - The analysis of potential fiscal risks from SNGs is neither discussed nor disclosed in the FRS. - Local governments rely on government transfers and on-lending resources to fund their expenses; Tbilisi municipality is the least dependent on the central government. - On aggregate, on-lending to SNGs is estimated at 0.8 percent of GDP at end 2022 (down from 1.2 percent in 2021 mainly due to the exchange rate appreciation). - Out of approximately 28 SNGs projects between 2016 and 2022, 8 were restructured, half of these between 2021 and 2022. - SNG-owned public companies are also beneficiaries of on-lent resources, increasing the portfolio’s exposure to the financial health of SNGs. *Source: Excerpts from the IMF Technical Report (2022 FRS and related chapters).* ### 112. Fiscal transparency and ### Fiscal transparency and ### Sub-national governments (SNGs): monitoring focus - Fiscal transparency and risk monitoring practices can be substantially improved by focusing on a limited number of SNGs. - The relatively large size of a few SNG entities reduces the oversight burden for the MoF. - Monitoring could be limited to the municipalities of Tbilisi, Batumi, and Kutaisi, which together represent 43 percent of the total SNGs’ expenditures of the sector. - Developing priority-based analysis and disclosing it in the FRS would complement the existing reporting mechanism and would support an advanced level of practice. ### Public Corporations (Good, Improved from Basic in 2016) - The government publishes detailed information on public corporations, including estimates of quasi-fiscal activities, but no government ownership policy has yet been approved. - Assets and liabilities of PCs represented approximately 12.6 and 7.8 percent of GDP in 2021. - PCs generated a net profit of GEL 543 million or 19 percent of return on equity. - The 2022 FRS identifies subsidies and dividends as main flows with government (0.4 and 0.1 percent of GDP, respectively). - PCs are beneficiaries of on-lending from the government, with an estimated stock of 4.2 percent of GDP in 2021. - The FRS presents first estimates of quasi-fiscal activities undertaken by three PCs, including Georgian Oil and Gas Corporation estimated at GEL 302 million or 0.5 percent of GDP in 2021. - Figures present key financial indicators and risk rankings for a subset of PCs; note that colors indicate risk level: red = high risk; yellow = medium risk; light green: low risk; green = very low risk. - MKR is a joint venture classified in the sector of corporations under foreign control; included in the FRS for transparency purposes. ### Enhancements since 2016 and ongoing reforms - Data coverage expanded from mostly budget flows to financial performance indicators and risk analysis. - The 2022 FRS provides a consolidated view of the sector and “deep dive” analyses, ranking PCs by perceived level of risk. - QFA disclosure was enhanced to show estimated value, foregone revenue, and actual cost of providing services. - A reform strategy was approved by the Government in 2022. - The law on public corporations is currently being drafted with World Bank technical assistance and will cover development of the government’s SOE ownership policy. - Authorities expect the public corporation law to be finalized by end-2023 and to be approved in 2024. - The reform is based on five pillars, including developing an ownership policy and ensuring competitive neutrality. - Dividend distribution practices have been ad-hoc (example: 2021 FRS noted a dividend payment to ensure the Partnership Fund could meet a debt service obligation). - Competitive neutrality requires identifying implicit or indirect state support (e.g., on-lending at market conditions will require charging a spread over the conditions received by government). - Implicit QFAs that undermine PC profitability (e.g., overemployment or public service obligations) need to be identified and addressed. ### Key figures and indicators (as reported) - Assets of PCs: approximately 12.6 percent of GDP in 2021. - Liabilities of PCs: approximately 7.8 percent of GDP in 2021. - Net profit of PCs: GEL 543 million. - Return on equity (ROE): 19 percent. - Subsidies from government to PCs: 0.4 percent of GDP. - Dividends from PCs to government: 0.1 percent of GDP. - On-lending stock to PCs: 4.2 percent of GDP in 2021. - Georgian Oil and Gas Corporation QFA estimate: GEL 302 million or 0.5 percent of GDP in 2021. ### Recommendations (Priorities for greater transparency in disclosure of fiscal risks) - Recommendation 3.1. Strengthen the quantification and disclosure of fiscal risks in the Fiscal Risks Statement. - Provide more detailed information about planned policy responses for negative macroeconomic scenarios. - Expand FRS coverage to include specific risks arising from SNGs and the financial sector, including both likelihood and potential fiscal impact. Leverage information compiled by entities outside the MoF (e.g., the NBG’s Financial Stability Report, PBO). - Further develop the long-term sustainability analysis in the 2022 FRS, covering fiscal implications of the pension reform and the health sector. - Strengthen assessment of new pension schemes and existing social assistance payments to determine NPV of pension commitments. - Complete sensitivity analysis of above commitments to key macro variables. - Streamline the PC section of the FRS, providing detailed assessment as an annex. - Improve disclosure of PPPs/PPAs by standardizing tables across vintages and by presenting government commitments in NPV and by year over the overall project life cycle. - Recommendation 3.2. Tighten criteria for accessing contingency reserves. - Rationalize the number and objective of reserve funds to include only those related to unforeseen and unavoidable situations. - Develop and publish regulations on: (i) rules for establishing new reserve funds; (ii) limits on the total size of all reserve funds; and (iii) specific criteria for use of resources from the reserve funds. - Note: The Budget Code specifies the size and adjustment limits for the State Budget Reserve Funds but not for other reserve funds. - Recommendation 3.3. Enhance fiscal risks monitoring and management. - Ensure full adherence to the requirements of Public Debt Law (risk assessment and risk fund creation) before considering issuance of new guarantees. - Develop methodology to assess risks to the state budget from issuing guarantees. - Use this methodology to determine fees to be paid by the beneficiary to the risk fund. - Improve monitoring of three largest SNGs to assess likelihood of government support and identify mitigation measures. - Disclose on-lending portfolio from state budget, subsidies from SNGs to PCs, and key fiscal performance indicators. - Analyze SNGs capacity to repay the on-lending portfolio and include it in the FRS. - Undertake comprehensive analysis of financial sector risks from a fiscal perspective; consider confidentiality for MoF and NBG use only due to moral hazard concerns. - Enhance asset management through better management of on-lending portfolio and equity investments in PCs; introduce risk spread in on-lending portfolio to offset restructuring costs. - Develop and approve a PC ownership policy as part of the new Public Corporation Law currently being drafted. - Prepare a strategy to guide government response to crises with social, economic, and environmental effects that demand immediate government action; the strategy should identify potential triggers, types of activities, potential financing vehicles, and fiscal impacts of disaster risk management. - Update the 2017-2020 National Disaster Risk Reduction Strategy and associated Action Plan. - Report on achievements intended in the 2017-2020 Action Plan. - Develop and adopt policies and methods for managing fiscal impacts of natural disasters. ### Summary evaluation highlights (Table 3.5 excerpts) - 3.1.1 Macroeconomic Risks: Advanced. Low importance. Notes: Macro analysis includes alternative scenarios; scenarios presented in probabilistic “fan chart”. - 3.1.2 Specific Fiscal Risks: Advanced. Medium importance. Notes: FRS includes basic analysis of QFAs and long-term risks; high concentration in financial sector and SNGs warrants detailed assessment. - 3.1.3 Long-term Fiscal Sustainability: Basic. High importance. Notes: Annual DSA provides long-term perspective; limited disclosure of long-term sustainability analysis of health and pension. - 3.2.1 Budgetary Contingencies: Basic. Medium importance. Notes: Budget includes reserve fund allocations; access criteria do not exist. Aggregate amount appropriated for reserve funds account for 2.9 percent of total expenditure appropriations for the 2023 budget. - 3.2.2 Asset & Liability Management: Good. Low importance. Notes: Strong legal framework for debt management; asset management focused on Treasury assets. - 3.2.3 Guarantees: Good. Low importance. Notes: Guarantees account for 0.01 percent GDP. Methodology for risk evaluation and defining amount to be deposited in Risk Fund is pending. - 3.2.4 Public Private Partnerships: Good. Medium importance. Notes: Updates to regulatory framework placed limits on PPP commitments; contingent cost of energy market of 8 percent of GDP in adverse scenario. - 3.2.5 Financial Sector Exposure: Advanced. Medium importance. Notes: NBG’s AFSR provides detailed sector overview; few banks comprise about 75 percent of assets and loans and hold 50 percent public domestic bonds. - 3.2.6 Natural Resources: Not met. Low importance. Notes: Estimates of mineral deposit volumes published but not costs; does not publish production, sales, or fiscal revenue of previous year. - 3.2.7 Environmental Risks: Good. High importance. Notes: Historical and likely future costs of natural disasters quantified and published in the FRS; no strategy to manage fiscal risks from them. - 3.3.1 Sub-national Governments: Good. Medium importance. Notes: Quarterly and annual reporting published; on-lending to SNGs represents 1 percent of GDP; limited analysis of repayment capacity. - 3.3.2 Public Corporations: Good. High importance. Notes: Analysis of PC financial results, related fiscal risks, QFAs, and government transactions included in FRS; PC ownership policy is being developed. Exposure to economic shocks due to average debt to assets ratio of 60 percent and FX linked; as of 2022 on-lending of 3 percent of GDP. *IMF | Technical Report (excerpts from content unit).* --- _Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024024.pdf_