## 1. Priority

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---

### Mission background and objectives
- A remote technical assistance (TA) mission took place during April 26–May 24, 2021, at the request of the Georgia authorities, conducted in coordination with the IMF’s Middle East and Central Asia Department (MCD) and financed by the Data for Decisions Trust Fund (D4D).
- Main task: assist the Ministry of Finance (MoF) to compile Government Finance Statistics (GFS) for non-market state-owned enterprises (SOEs) identified in the 2019 sectorization exercise to meet Georgia’s commitments in the IMF’s extended arrangement under the Extended Fund Facility.

### Sectorization and database
- Sectorization exercise examined 236 SOEs and determined that 183 units operated on a non-market basis and should be consolidated within the general government sector.
- MoF maintains an SOE database (FRMD) with time series for 352 enterprises (including SOEs and large municipal enterprises with more than 25 percent state ownership). Data sources: financial statements, National Statistics Office, and other administrative sources.
- The database was supplemented with cash flow statements and detailed items, allowing GFSM 2014-based compilation for non-market SOEs where source data was available (65 large units). These covered 84 percent of all non-market SOEs in terms of annual turnover.

### Pilot GFS compilation scope
- GFSM 2014-based Statement of Operations and Balance Sheet for 2019 compiled for non-market SOEs where source data was available (65 large units).
- Statement of Operations and Balance Sheet were compiled separately for 10 large units and six economic sectors; remaining 55 companies compiled by sector: agriculture, healthcare, sport, transport, utility sector, and other industries.

### Key findings from the pilot compilation (2019)
- Inclusion of non-market SOEs increases fiscal deficit by 0.6 percent of GDP for 2019.
- Statement of Operations of non-market SOEs, 2019 (million GEL / Percent of GDP):
  - Revenue: 1,175 / 2.4
  - Taxes & social contributions: 0 / 0.0
  - Grants: 278 / 0.6
  - Other revenue: 897 / 1.8
  - Expenditure: 1,485 / 3.0
  - Compensation of employees: 107 / 0.2
  - Use of goods and services: 713 / 1.4
  - Consumption of fixed capital: 55 / 0.1
  - Interest: 70 / 0.1
  - Subsidies: 0 / 0.0
  - Grants (expense): 46 / 0.1
  - Social benefits: 0 / 0.0
  - Other expense: 79 / 0.2
  - Net investment in nonfinancial assets: 417 / 0.8
  - Net lending (+) / Net borrowing (-): -310 / -0.6
  - Financing: -315 / -0.6
  - Net acquisition of financial assets: -139 / -0.3
  - Net incurrence of liabilities: 175 / 0.4
  - Statistical discrepancy: NLB vs Financing: -5 / 0.0
- Revenue composition: government grants accounted for 24 percent of total revenues; almost half of grants related to transfers of non-financial assets from government to SOEs.
- Financing of SOE deficit: incurrence of debt 0.4 percent of GDP and disposals of financial assets 0.3 percent of GDP.

### Balance sheet impacts (2019)
- Balance sheet of non-market SOEs, 2019 (million GEL / Percent of GDP):
  - Total assets: 4,408 / 8.9
  - Nonfinancial assets: 2,097 / 4.3
  - Financial assets: 2,311 / 4.7
    - Currency and deposits: 152 / 0.3
    - Loans: 53 / 0.1
    - Equity and investment fund shares: 1,857 / 3.8
    - Other accounts receivable: 248 / 0.5
  - Liabilities: 4,403 / 8.9
    - Loans: 1,272 / 2.6
    - Equity and investment fund shares: 2,871 / 5.8
    - Other accounts payable: 260 / 0.5
  - Net financial worth: -2,092 / -4.2
- Consolidation effect on general government:
  - Value of non-financial assets of non-market SOEs: 4.3 percent of GDP.
  - Value of financial assets of non-market SOEs: 4.7 percent of GDP.
  - Value of debt liabilities of non-market SOEs: 3.1 percent of GDP, of which on-lending from government represented around 2 percent of GDP.
  - Consolidated general government debt including SOEs would increase by 1.1 percent of GDP.
  - Net financial worth of general government would decrease by 4.2 percent of GDP in 2019 as a result of consolidation.

### Differences between accounting financial statements and GFS results (2019)
- Income (accounting): 1,002 million GEL; Transition to GFS: +173; GFS Revenue: 1,175.
- Expense (accounting): 1,285 million GEL; Transition to GFS: -217; GFS Expense: 1,068.
- Net profit (accounting): -283 million GEL; Transition to GFS: +390; Operating balance (GFS): 107.
- Net investment in nonfinancial assets (GFS): +417.
- Net lending/net borrowing (GFS): -310.
- Quantified impacts:
  - Revenue higher by 173 million GEL (0.35 percent of GDP) under GFS than income statements.
  - Expense lower by 217 million GEL (0.44 percent of GDP) under GFS than income statements.
  - GFS methodology implied a positive impact of 390 million GEL (0.79 percent of GDP) on the operating balance compared to net profit in 2019.
  - Adding expenditure on net acquisition of non-financial assets (not in income statement) increased expenditure by 417 million GEL (0.85 percent of GDP).
  - Ultimate fiscal balance (net lending/net borrowing) was -310 million GEL (-0.63 percent of GDP) in 2019.
  - Differences between net lending/net borrowing and net profit by individual non-market SOEs varied between -0.27 percent of GDP (United Water Supply Company) and +0.24 percent of GDP (transport sector).
- Conceptual note: Accounting financial statements aim to report individual organization performance; GFS aims for macro-level fiscal analysis in conformity with national accounts, external statistics, and monetary financial statistics. Differences in objectives lead to differences in classification, valuation, and treatment of items.

### Transparency, coverage, and capacity considerations
- Current GFS coverage limited to budgetary entities; extra-budgetary entities (LEPLs and newly identified non-market SOEs) are not included in regular GFS reporting.
- Source data for LEPLs is readily available; their consolidation with budgetary entities’ GFS should be achievable in the short-term.
- Introducing regular GFS compilation for non-market SOEs and compiling a balance sheet will bring new challenges and capacity needs.
- Current capacity dedicated to GFS may be insufficient for the expanded tasks (balance sheet and GFS for non-market SOEs) on a regular basis.
- Recommendation to review institutional framework to ensure appropriate institutional arrangements and improved capacity for collection/processing of SOE source data and sufficient resources/technical support for expanded GFS compilation.

### Priority recommendations (target dates, actions, responsible institution)
- December 2021: Establish appropriate institutional arrangements for the collection and processing of source data for SOEs. — Responsible: MoF
- December 2021: Review the existing institutional framework and capacities dedicated to GFS to ensure sufficient resources and technical support for the compilation of an expanded GFS. — Responsible: MoF
- November 2021 / January 2022 / March 2022: Expand the coverage of GFS:
  - Include extra-budgetary entities (LEPLs) in the annual GFS and continue regular dissemination of the expanded GFS reporting.
  - Initiate compilation of the general government balance sheet.
  - Initiate compilation of GFS for non-market SOEs to consolidate these in the annual reporting for the general government.
  — Responsible: MoF (GFS team)
- Note: Following the mission recommendations, in the course of June 2021, the MoF submitted revised GFS time series including LEPLs to STA.

### Financing of non-market SOEs and grants (pilot compilation)
- Around 20 percent of non-market SOEs’ expenditure was financed by grants from government.
- Estimated value of grants received by non-market SOEs from the State and local government: 278 mill GEL (0.6 percent of GDP).
  - Of which 145 mill GEL was provided in cash.
  - Of which 133 mill GEL was provided in kind (by transfers of non-financial assets).
- Due to incomplete source data and time constraints, tax and dividend payments by SOEs to their owners were not consolidated during the mission.

### Expanding GFS coverage and sector classification
- Publicly available GFS limited to budgetary entities, excluding LEPLs. No data on extra-budgetary funds (EBFs) were reported.
- Historical estimate (from 2017 TA mission): by end-2015, LEPLs own revenues represented about 12 percent of general government total revenue, and about 17 percent of total expenditures. Inclusion of LEPLs in general government statistics for 2015 would: (i) increase revenue by 4.5 percent of GDP; (ii) increase expenditures by 4.3 percent of GDP; and (iii) decrease the general government deficit by 0.2 percent of GDP for 2015.
- Note: Following the mission’s recommendations, the MoF submitted to the IMF Statistics Department after the mission, in the course of June 2021, revised GFS for 2004-2020 including LEPLs.
- Including non-market SOEs crucial but requires additional capacity: need operational system for collecting full set of financial statements, processing (including quality checks), bridging source data into GFS categories, and consolidating results with other GG units.
- Institutional arrangements — options and considerations:
  - Decide which entity collects/processes financial statements: national statistical office, tax authority, or Treasury staff. Treasury may yield higher response rate and data quality from SOEs.
  - Consider inclusion of non-market SOEs into the Treasury Single Account (TSA) to obtain timely, high-frequency cash data while maintaining accrual source data at least annually. Special considerations before including SOEs that may become commercial/public corporations; in principle, unless an SOE is discharging a government function, it should not be included in the TSA.
  - Resources devoted to GFS compilation and institutional arrangements should be reviewed: currently three staff members of the Fiscal Forecasting Division are involved in GFS compilation for central and local budgetary units alongside other tasks. Best practice is a special unit/division devoted exclusively to GFS compilation.

### Sectorization of public entities engaged in financial activities
- Pension Agency:
  - Established on August 15, 2018; launched on January 1, 2019 in accordance with the Law of Georgia on Cumulative Pensions dated August 6, 2018.
  - Supervised by a Supervisory Board (composed of three ministers and one private official), except for investment activities supervised by the National Bank of Georgia.
  - Defined-contribution pension scheme with features of a ‘second pillar’ cumulative pension scheme, or a ‘provident fund’ as defined in the GFSM 2014.
  - The fund is an autonomous institutional unit operating as a financial intermediary, bearing related risks and rewards; meets criteria to be classified in the financial corporation sub-sector.
- Deposit Guarantee Fund:
  - Should be classified in the GG sector based on GFSM 2014 since fees payable to the scheme are compulsory and beneficiaries (banks) cannot opt out.

### Balance sheet compilation and dissemination
- Current status:
  - GFS reporting does not include a balance sheet, except for data on stocks of debt of the central government budgetary entities.
  - Mission compiled a pilot balance sheet for non-market SOEs for 2019 but could not produce a consolidated general government balance sheet due to limited statistical reporting on central government debt only.
- Benefits and approach:
  - Dissemination of balance sheet data within GFS reporting will enhance quality and transparency.
  - Initiating balance sheet compilation based on available source data is an opportunity to review existing source data and identify gaps in completeness and valuation relative to GFSM 2014 requirements.
  - Check consistency of stock data with Monetary and Financial Statistics and International Investment Position compiled by the National Bank (e.g., deposits, loans, equities, debt liabilities).
  - Valuation of non-financial assets could be addressed using estimates based on replacement (market) costs compiled by the Statistical Agency for national accounts purposes.
- Implementation caveat:
  - Implementing required changes in accounting source data might be a long-term task; interim statistical adjustments are necessary to improve completeness and quality.

### The way forward and action plan (priorities and target dates)
- High priority actions and target completion dates:
  - Establish appropriate institutional arrangements for the collection and processing source data for SOEs. — Target Completion Date: December 2021
  - Review the existing institutional framework and capacities dedicated to GFS to ensure sufficient resources and technical support for the compilation of an expanded GFS. — Target Completion Date: December 2021
  - Expand the coverage of GFS:
    - Include extra-budgetary funds (LEPLs) and the Deposit Guarantee Fund in the annual GFS and continue regular dissemination of the expanded GFS reporting. — Target Completion Date: November 2021
    - Initiate compilation of the general government balance sheet on an annual basis. — Target Completion Date: January 2022
    - Initiate compilation of GFS for non-market SOEs to consolidate these in the annual reporting for the general government. — Target Completion Date: March 2022
- Capacity building and TA:
  - Authorities committed to expand fiscal reporting in line with international standards.
  - Further TA might be needed, including from the newly established IMF’s Regional Capacity Development Center for the Caucasus, Central Asia and Mongolia (CCAMTAC).
  - In the meantime, authorities should be in a position to start disseminating GFS including LEPLs and the Deposit Guarantee Fund.

### Priority recommendations (concise)
- Establish institutional arrangements and review capacities (MoF) — Target Completion Date: December 2021.
- Include LEPLs and Deposit Guarantee Fund in annual GFS — Target Completion Date: November 2021.
- Initiate general government balance sheet compilation — Target Completion Date: January 2022.
- Initiate GFS compilation for non-market SOEs for consolidation with general government — Target Completion Date: March 2022.

### Appendix I. Bridging Financial Statements into the GFS — key steps
- 1 Compile revenue and expense — Source: Income Statement.
- 2 Exclude income/expense that do not belong to GFS revenue/expenditure categories (other economic flows; transactions in financial assets/liabilities) — Source: Income Statement and/or notes.
- 3 Include transactions in revenue and expense not covered in the Income Statement (taxes, subsidies, dividends, other current and capital transfers) — Source: Cash Flow Statement and/or notes.
- 4 Compile net investments in non-financial assets:
  - Cash transactions on purchase and sale of non-financial assets — Source: Cash Flow Statement.
  - Add non-monetary transactions in non-financial assets (transfers of NFA) — Source: Notes.
  - Deduct depreciation as proxy for consumption of fixed capital — Source: Income Statement.
- 5 Compile financing operations:
  - Use cash inflows/outflows on financial instruments — Source: Cash Flow Statement.
  - Add accrued interest receivable/payable when relevant — Source: Income Statement.
  - Transactions in other accounts receivable/payable compiled as change in stocks (proxy) — Source: Balance sheet.
  - Add non-monetary transactions in financial assets/liabilities (debt-equity conversions, injections, debt assumption/cancellation) — Source: Statement of Changes in Equity and notes.
- 6 Compile balance sheet:
  - Convert accounting balance sheet into GFS categories using notes; examine valuation principles — Source: Balance sheet, notes.
- 7 Reconcile stocks and flows:
  - Compare changes in stocks with related transactions and other economic flows; amend revenue, expenditure, and financing accordingly — Source: GFS statement of operations and balance sheet, and notes.

*IMF | Technical Report – Georgia GFS for SOEs*

### 1. Priority

### 1. Priority

### Mission background and objectives
- A remote technical assistance (TA) mission took place during April 26–May 24, 2021, at the request of the Georgia authorities, conducted in coordination with the IMF’s Middle East and Central Asia Department (MCD) and financed by the Data for Decisions Trust Fund (D4D).
- Main task: assist the Ministry of Finance (MoF) to compile Government Finance Statistics (GFS) for non-market state-owned enterprises (SOEs) identified in the 2019 sectorization exercise to meet Georgia’s commitments in the IMF’s extended arrangement under the Extended Fund Facility.

### Sectorization and database
- Sectorization exercise examined 236 SOEs and determined that 183 units operated on a non-market basis and should be consolidated within the general government sector.
- MoF maintains an SOE database (FRMD) with time series for 352 enterprises (including SOEs and large municipal enterprises with more than 25 percent state ownership). Data sources: financial statements, National Statistics Office, and other administrative sources.
- The database was supplemented with cash flow statements and detailed items, allowing GFSM 2014-based compilation for non-market SOEs where source data was available (65 large units). These covered 84 percent of all non-market SOEs in terms of annual turnover.

### Pilot GFS compilation scope
- The mission and MoF compiled GFSM 2014-based Statement of Operations and Balance Sheet for 2019 for non-market SOEs where source data was available (65 large units).
- The Statement of Operations and Balance Sheet were compiled separately for 10 large units and six economic sectors; remaining 55 companies compiled by sector: agriculture, healthcare, sport, transport, utility sector, and other industries.

### Key findings from the pilot compilation (2019)
- Inclusion of non-market SOEs increases fiscal deficit by 0.6 percent of GDP for 2019.
- Statement of Operations of non-market SOEs, 2019 (million GEL / Percent of GDP):
  - Revenue: 1,175 / 2.4
  - Taxes & social contributions: 0 / 0.0
  - Grants: 278 / 0.6
  - Other revenue: 897 / 1.8
  - Expenditure: 1,485 / 3.0
  - Compensation of employees: 107 / 0.2
  - Use of goods and services: 713 / 1.4
  - Consumption of fixed capital: 55 / 0.1
  - Interest: 70 / 0.1
  - Subsidies: 0 / 0.0
  - Grants (expense): 46 / 0.1
  - Social benefits: 0 / 0.0
  - Other expense: 79 / 0.2
  - Net investment in nonfinancial assets: 417 / 0.8
  - Net lending (+) / Net borrowing (-): -310 / -0.6
  - Financing: -315 / -0.6
  - Net acquisition of financial assets: -139 / -0.3
  - Net incurrence of liabilities: 175 / 0.4
  - Statistical discrepancy: NLB vs Financing: -5 / 0.0
- Revenue composition: government grants accounted for 24 percent of total revenues; almost half of grants related to transfers of non-financial assets from government to SOEs.
- Financing of SOE deficit: incurrence of debt 0.4 percent of GDP and disposals of financial assets 0.3 percent of GDP.

### Balance sheet impacts (2019)
- Balance sheet of non-market SOEs, 2019 (million GEL / Percent of GDP):
  - Total assets: 4,408 / 8.9
  - Nonfinancial assets: 2,097 / 4.3
  - Financial assets: 2,311 / 4.7
    - Currency and deposits: 152 / 0.3
    - Loans: 53 / 0.1
    - Equity and investment fund shares: 1,857 / 3.8
    - Other accounts receivable: 248 / 0.5
  - Liabilities: 4,403 / 8.9
    - Loans: 1,272 / 2.6
    - Equity and investment fund shares: 2,871 / 5.8
    - Other accounts payable: 260 / 0.5
  - Net financial worth: -2,092 / -4.2
- Consolidation effect on general government:
  - Value of non-financial assets of non-market SOEs: 4.3 percent of GDP.
  - Value of financial assets of non-market SOEs: 4.7 percent of GDP.
  - Value of debt liabilities of non-market SOEs: 3.1 percent of GDP, of which on-lending from government represented around 2 percent of GDP.
  - Consolidated general government debt including SOEs would increase by 1.1 percent of GDP.
  - Net financial worth of general government would decrease by 4.2 percent of GDP in 2019 as a result of consolidation.

### Differences between accounting financial statements and GFS results
- Application of the GFSM 2014 methodology vs accounting income statements for non-market SOEs (2019):
  - Income (accounting): 1,002 million GEL; Transition to GFS: +173; GFS Revenue: 1,175.
  - Expense (accounting): 1,285 million GEL; Transition to GFS: -217; GFS Expense: 1,068.
  - Net profit (accounting): -283 million GEL; Transition to GFS: +390; Operating balance (GFS): 107.
  - Net investment in nonfinancial assets (GFS): +417.
  - Net lending/net borrowing (GFS): -310.
- Quantified impacts:
  - Revenue higher by 173 million GEL (0.35 percent of GDP) under GFS than income statements.
  - Expense lower by 217 million GEL (0.44 percent of GDP) under GFS than income statements.
  - GFS methodology implied a positive impact of 390 million GEL (0.79 percent of GDP) on the operating balance compared to net profit in 2019.
  - Adding expenditure on net acquisition of non-financial assets (not in income statement) increased expenditure by 417 million GEL (0.85 percent of GDP).
  - Ultimate fiscal balance (net lending/net borrowing) was -310 million GEL (-0.63 percent of GDP) in 2019.
  - Differences between net lending/net borrowing and net profit by individual non-market SOEs varied between -0.27 percent of GDP (United Water Supply Company) and +0.24 percent of GDP (transport sector).
- Conceptual note: Accounting financial statements aim to report individual organization performance; GFS aims for macro-level fiscal analysis in conformity with national accounts, external statistics, and monetary financial statistics. Differences in objectives lead to differences in classification, valuation, and treatment of items.

### Transparency, coverage, and capacity considerations
- Current GFS coverage limited to budgetary entities; extra-budgetary entities (LEPLs and newly identified non-market SOEs) are not included in regular GFS reporting.
- Source data for LEPLs is readily available; their consolidation with budgetary entities’ GFS should be achievable in the short-term.
- Introducing regular GFS compilation for non-market SOEs and compiling a balance sheet will bring new challenges and capacity needs.
- Current capacity dedicated to GFS may be insufficient for the expanded tasks (balance sheet and GFS for non-market SOEs) on a regular basis.
- Recommendation to review institutional framework to ensure appropriate institutional arrangements and improved capacity for collection/processing of SOE source data and sufficient resources/technical support for expanded GFS compilation.

### Priority recommendations (target dates, actions, responsible institution)
- December 2021: Establish appropriate institutional arrangements for the collection and processing of source data for SOEs. — Responsible: MoF
- December 2021: Review the existing institutional framework and capacities dedicated to GFS to ensure sufficient resources and technical support for the compilation of an expanded GFS. — Responsible: MoF
- November 2021 / January 2022 / March 2022: Expand the coverage of GFS:
  - Include extra-budgetary entities (LEPLs) in the annual GFS and continue regular dissemination of the expanded GFS reporting.
  - Initiate compilation of the general government balance sheet.
  - Initiate compilation of GFS for non-market SOEs to consolidate these in the annual reporting for the general government.
  — Responsible: MoF (GFS team)
- Note: Following the mission recommendations, in the course of June 2021, the MoF submitted revised GFS time series including LEPLs to STA.

*Source: IMF and MoF calculations, GFSM 2014-based pilot compilation as reported in the mission summary.*

### 17. A brief overview of the conceptual differences between accounting financial statement and GFS,

### 17. A brief overview of the conceptual differences between accounting financial statement and GFS,

### Conceptual differences between accounting financial statements and GFS
- Operating balance/net profit
  - GFS strictly distinguishes between transactions (operations resulting from government’s decisions) and other economic flows (events generally out of government control, e.g., revaluation gains/losses due to changes in exchange rates or other changes in market prices; losses on fixed assets from a natural disaster).
  - The GFS based fiscal balance measures the impact of government transactions/operations, excluding other economic flows.
  - Accounting net profit (income statement) is impacted by both transactions and other economic flows; income statement classifies both as income and expense.
  - The income statement may include some transactions in financial assets/liabilities that GFS treats as financing rather than revenue/expense.
  - Depending on the accounting standard in use, some transfers may not be included in the income statement (e.g., subsidies, capital transfers, taxes, dividends).
- Net lending/net borrowing (NLB)
  - GFS includes expenditures related to net investment in non-financial assets (acquisitions less disposals less consumption of fixed capital) in addition to revenue and expense.
  - The GFS ultimate balance of government operations, net lending/net borrowing, is impacted by transactions in non-financial assets as well as revenue/expense.
  - Financial statements do not report such an indicator.
- Financing
  - Financial statements do not provide comprehensive information on transactions in financial assets and liabilities beyond stock positions in the balance sheet and some cash flow statement items.
  - In GFS, financing data is an inevitable element of the statement of operations, showing how net lending/net borrowing was financed and the impact on the government balance sheet.
  - Financing data should be reconcilable with operations in revenue and expenditure and with stocks of financial assets and liabilities; reconciliation serves as an important quality check on fiscal balances and the financial balance sheet.
- Reference note
  - Detailed description of the differences is provided in Appendix 6 of the GFSM 2014.

### Consolidation of Non-market SOEs within the General Government Sector (summary of adjustments and impacts)
- Rationale
  - Consolidation of accrual-based GFS for non-market SOEs within the general government (GG) sector requires amendments to cash-based data for budgetary entities.
  - Large values of non-monetary (in kind) transfers between budgetary entities and non-market SOEs were identified for 2019.
  - These operations mainly refer to: (i) transfers of non-financial assets from the state to SOEs (mostly executed as injections into equity capital, but recorded as an expense in GFS); and (ii) transfers of non-financial assets from SOEs to the State.
  - To allow proper consolidation, non-monetary transfers should be imputed to revenues and expenditures of budgetary entities as these are currently reported on a cash basis.
- Table 5 (Consolidation of Non-Market SOEs within the General Government Sector, 2019) — selected figures (million GEL)
  - Revenue: 12,907 | Accrual adjustments: 32 | Amended GFS: 12,940 | Non-market SOEs (accrual): 1,175 | Consolidated GG incl. SOEs: 13,837 | Total impact: 929
  - Expenditure: 14,260 | Accrual adjustments: 33 | Amended GFS: 14,257 | Non-market SOEs (accrual): 1,485 | Consolidated GG incl. SOEs: 15,464 | Total impact: 1,204
  - Expense: 10,832 | Accrual adjustments: 133 | Amended GFS: 10,929 | Non-market SOEs (accrual): 1,068 | Consolidated GG incl. SOEs: 11,719 | Total impact: 887
  - Investment in non-financial assets: 3,428 | Accrual adjustments: -100 | Amended GFS: 3,328 | Non-market SOEs (accrual): 417 | Consolidated GG incl. SOEs: 3,744 | Total impact: 316
  - Net lending (+) / Net borrowing (-): -1,353 | Accrual adjustments: 0 | Amended GFS: -1,317 | Non-market SOEs (accrual): -310 | Consolidated GG incl. SOEs: -1,627 | Total impact: -274
  - Financing: -1,353 | Accrual adjustments: 0 | Amended GFS: -1,317 | Non-market SOEs (accrual): -315 | Consolidated GG incl. SOEs: -1,632 | Total impact: -279
  - Net acquisition of financial assets: 15 | Accrual adjustments: 35 | Amended GFS: 50 | Non-market SOEs (accrual): -139 | Consolidated GG incl. SOEs: -91 | Total impact: -106
  - Net incurrence of liabilities: 1,367 | Accrual adjustments: 0 | Amended GFS: 1,367 | Non-market SOEs (accrual): 175 | Consolidated GG incl. SOEs: 1,541 | Total impact: 174
  - Discrepancy: 0 | Accrual adjustments: 0 | Amended GFS: 0 | Non-market SOEs (accrual): -5 | Consolidated GG incl. SOEs: -5 | Total impact: -5
- Treatment of transfers in kind (2019 illustrative adjustments)
  - Transfers of non-financial assets from State to non-market SOEs treated as an expense (capital grant) matched by a decrease in non-financial assets: 133 mill GEL (treated by mission).
  - Withdrawal of non-financial assets by the State from SOEs treated as revenue (capital grant) matched by an increase in State’s non-financial assets: 32 mill GEL (treated by mission).
  - Special purpose grants from State to SOEs accounted for 35 mill GEL in 2019; SOEs treated these as financing (liability in other accounts payable) reflecting prepayment to finance future capital expenditure. For proper consolidation, related cash-based expense in grants of budgetary entities should be reclassified into financing (acquisition of a claim/other accounts receivable to SOEs), decreasing the deficit by 35 mill GEL (Table 5, column 4).
- Impact on fiscal balance visibility
  - Including transfers in kind will not change the fiscal balance but will transparently show increased government expenses and reduction of government assets (see Table 5, column 2).
- Data and limitations
  - Data on transfers of NFA are based on notes to financial statements and some assumptions where direct information was not available.

### Financing of non-market SOEs and grants
- Based on pilot compilations
  - Around 20 percent of non-market SOEs’ expenditure was financed by grants from government.
  - Estimated value of grants received by non-market SOEs from the State and local government: 278 mill GEL (0.6 percent of GDP).
    - Of which 145 mill GEL was provided in cash.
    - Of which 133 mill GEL was provided in kind (by transfers of non-financial assets).
  - Due to incomplete source data and time constraints, tax and dividend payments by SOEs to their owners were not consolidated during the mission.

### Expanding GFS coverage and sector classification
- Current coverage
  - Publicly available GFS is limited to budgetary entities, excluding LEPLs. No data on extra-budgetary funds (EBFs) were reported.
  - In Georgia, the subsector of EBFs should cover LEPLs and non-market SOEs.
- LEPLs
  - Source data for LEPLs is readily available; introducing regular reporting consolidating these entities within GFS should be achievable in the short-term.
  - Inclusion would have a noticeable impact on fiscal aggregates and enhance transparency.
  - Historical estimate (from 2017 TA mission): by end-2015, LEPLs own revenues represented about 12 percent of general government total revenue, and about 17 percent of total expenditures. Inclusion of LEPLs in general government statistics for 2015 would: (i) increase revenue by 4.5 percent of GDP; (ii) increase expenditures by 4.3 percent of GDP; and (iii) decrease the general government deficit by 0.2 percent of GDP for 2015.
  - Note: Following the mission’s recommendations, the MoF submitted to the IMF Statistics Department after the mission, in the course of June 2021, revised GFS for 2004-2020 including LEPLs.
- Including non-market SOEs
  - Crucial but requires additional capacity: need operational system for collecting full set of financial statements, processing (including quality checks), bridging source data into GFS categories, and consolidating results with other GG units.
  - Source data from financial statements differ significantly from budget reporting; compilers need new skills and techniques to routinely compile GFS based on financial statements.
  - SOEs are numerous and not yet used to provide timely, high-quality, detailed data required by international statistical standards.
- Institutional arrangements — options and considerations
  - Decide which entity collects/processes financial statements: national statistical office, tax authority, or Treasury staff. Treasury may yield higher response rate and data quality from SOEs.
  - Process entire set of financial statements and consider supplementary questionnaires for reconciliation (e.g., reconciliation of stocks with specific movements).
  - Consider inclusion of non-market SOEs into the Treasury Single Account (TSA) to obtain timely, high-frequency cash data while maintaining accrual source data at least annually. Special considerations before including SOEs that may become commercial/public corporations; in principle, unless an SOE is discharging a government function, it should not be included in the TSA.
  - Resources devoted to GFS compilation and institutional arrangements should be reviewed: currently three staff members of the Fiscal Forecasting Division are involved in GFS compilation for central and local budgetary units alongside other tasks. Best practice is a special unit/division devoted exclusively to GFS compilation. That unit should cooperate closely with internal users (e.g., FRMD) to ensure fiscal reporting based on international standards supports fiscal policy needs.

### Sectorization of public entities engaged in financial activities
- Pension Agency
  - Established on August 15, 2018; launched on January 1, 2019 in accordance with the Law of Georgia on Cumulative Pensions dated August 6, 2018.
  - Supervised by a Supervisory Board (composed of three ministers and one private official), except for investment activities supervised by the National Bank of Georgia.
  - Defined-contribution pension scheme with features of a ‘second pillar’ cumulative pension scheme, or a ‘provident fund’ as defined in the GFSM 2014.
  - The fund is an autonomous institutional unit operating as a financial intermediary, bearing related risks and rewards; meets criteria to be classified in the financial corporation sub-sector.
- Deposit Guarantee Fund
  - Should be classified in the GG sector based on GFSM 2014 since fees payable to the scheme are compulsory and beneficiaries (banks) cannot opt out.

### Balance sheet compilation and dissemination
- Current status
  - GFS reporting does not include a balance sheet, except for data on stocks of debt of the central government budgetary entities.
  - Mission compiled a pilot balance sheet for non-market SOEs for 2019 but could not produce a consolidated general government balance sheet due to limited statistical reporting on central government debt only.
  - Central government financial statements produced by the Treasury annually provide data on the majority of stocks and are a good ground to start compiling a balance sheet despite observed source data gaps.
- Benefits and approach
  - Dissemination of balance sheet data within GFS reporting will enhance quality and transparency.
  - Initiating balance sheet compilation based on available source data is an opportunity to review existing source data and identify gaps in completeness and valuation relative to GFSM 2014 requirements.
  - Statistical balance sheet compilation requires statisticians to make appropriate adjustments to source data on a best-effort basis; cross-sector comparisons and counterparty information are important tools (e.g., compare government-owned shares/equities with stocks of equity capital of government-owned enterprises).
  - Check consistency of stock data with Monetary and Financial Statistics and International Investment Position compiled by the National Bank (e.g., deposits, loans, equities, debt liabilities).
  - Valuation of non-financial assets could be addressed using estimates based on replacement (market) costs compiled by the Statistical Agency for national accounts purposes.
- Implementation caveat
  - Implementing required changes in accounting source data might be a long-term task; interim statistical adjustments are necessary to improve completeness and quality.

### The way forward and action plan (priorities and target dates)
- High priority actions and target completion dates (from Table 6)
  - Establish appropriate institutional arrangements for the collection and processing source data for SOEs. — Target Completion Date: December 2021
  - Review the existing institutional framework and capacities dedicated to GFS to ensure sufficient resources and technical support for the compilation of an expanded GFS. — Target Completion Date: December 2021
  - Expand the coverage of GFS:
    - Include extra-budgetary funds (LEPLs) and the Deposit Guarantee Fund in the annual GFS and continue regular dissemination of the expanded GFS reporting. — Target Completion Date: November 2021
    - Initiate compilation of the general government balance sheet on an annual basis. — Target Completion Date: January 2022
    - Initiate compilation of GFS for non-market SOEs to consolidate these in the annual reporting for the general government. — Target Completion Date: March 2022
- Capacity building and TA
  - Authorities committed to expand fiscal reporting in line with international standards.
  - Further steps should focus on establishing appropriate institutional framework and ensuring sufficient capacities and technical support to include LEPLs, Deposit Guarantee Fund, non-market SOEs, and initiate balance sheet compilations.
  - As MoF reinforces capacities for GFS compilation, further TA might be needed, including from the newly established IMF’s Regional Capacity Development Center for the Caucasus, Central Asia and Mongolia (CCAMTAC).
  - In the meantime, authorities should be in a position to start disseminating GFS including LEPLs and the Deposit Guarantee Fund, which appears to be a non-market producer.

*IMF | Technical Report – Georgia GFS for SOEs*

### Appendix I. Bridging Financial Statements into the GFS

### Appendix I. Bridging Financial Statements into the GFS

### Overview
- Purpose: Procedure to convert source financial statements (Income Statement, Cash Flow Statement, Balance Sheet, Statement of Changes in Equity, and notes) into Government Finance Statistics (GFS) statement of operations and balance sheet.

### Steps to compile revenue and expenditure and reconcile with GFS
- 1 Compile revenue and expense
  - Source: Income Statement

- 2 Exclude income/expense from the Income Statement that do not belong to the GFS revenue/expenditure categories
  - Exclude other economic flows - revaluation and other changes in the volume of assets and liabilities (e.g., changes due to exchange rates, provisions, impairment, changes in the accounting methodology)
    - Source: Income Statement and/or notes to financial statements
  - Exclude transactions in financial assets and liabilities (e.g., investments in equity of subsidiaries)
    - Source: Income Statement and/or notes to financial statements

- 3 Include transactions in revenue and expense not covered in the Income Statement
  - Add other revenue and expense, such as taxes, subsidies, dividends, and other current and capital transfers, as relevant (depending on the coverage of the nationally based Income Statement)
    - Source: Cash Flow Statement and/or notes to financial statements

- 4 Compile net investments in non-financial assets (expenditure)
  - Compile cash transactions on purchase and sale of non-financial assets
    - Source: Cash Flow Statement
  - Add non-monetary transactions in non-financial assets (e.g., transfer of non-financial assets from/to government)
    - Source: Notes to financial statements
  - Deduct depreciation as a proxy to the consumption of fixed capital
    - Source: Income Statement

- 5 Compile financing operations
  - Use data on cash inflows/outflows on all financial instruments (e.g., loans granted, inflows from repayment of claims, inflows from borrowing, repayment of debt). Direct data on transactions in other accounts receivable/payable are usually not available.
    - Source: Cash Flow Statement
  - Add data on accrued interest receivable/payable, when relevant
    - Source: Income Statement
  - Transactions in other accounts receivable/payable compile as a change in stocks (a proxy substituting transactions)
    - Source: Balance sheet
  - When possible, exclude other economic flows (revaluation or write-offs) from the changes in stocks of other accounts receivable/payable
    - Source: Income Statement and/or notes to financial statements
  - Add non-monetary transactions in financial assets/liabilities (e.g., conversion of debt into the equity capital; injection into the capital by transfer of non-financial or financial assets; debt assumption or debt cancellation)
    - Source: Statement of Changes in Equity and notes to financial statements

- 6 Compile balance sheet
  - Convert data from the accounting balance sheet on a best effort basis into the GFS categories using supplementary information from notes to financial statements.
  - As a second priority, examine the compliance of valuation principles applied in the accounting with the GFS rules and principles.
    - Source: Balance sheet, notes to financial statements

- 7 Reconcile stocks and flows
  - Compare changes in stocks by individual (GFS) categories of assets/liabilities with related transactions from the statement of operations, and with data on other economic flows as identified in the income statement and notes to financial statements.
  - Examine discrepancies between stocks and flows, focusing on possibly missing transactions in assets and liabilities (e.g., transfers of assets for free, debt assumption/cancellation, financial leasing, etc.)
  - Amend data on revenue, expenditure, and financing accordingly.
    - Source: GFS statement of operations and balance sheet, and notes to financial statements

### Appendices: Participants and Officials Met
- Appendix II. List of Officials who Attended the GFS Workshop
  - 1 Shota Gunia — Head of Fiscal Risks Management Division
  - 2 Ana Chabashvili — First Category Junior Specialist at Fiscal Risks Management Division
  - 3 Maia Lavrinenko — Third Category Senior Specialist at Fiscal Risks Management Division
  - 4 Elene Chkheidze — First Category Junior Specialist at Fiscal Risks Management Division
  - 5 Mirza Gelashvili — Head of Macroeconomic Analysis and Fiscal Policy Planning Department
  - 6 Pridon Aslanikashvili — Deputy Head of Macroeconomic Analysis and Fiscal Policy Planning Department
  - 7 Ekaterine Guntsadze — Head of Budget Department
  - 8 Natia Gulua — Deputy Head of Budget Department
  - 9 Nato Khaladze — First Category Junior Specialist at State Debt Department
  - 10 Giorgi Mtskerashvili — First Category Junior Specialist at State Debt Department

- Appendix III. Officials Met During the Mission
  - Nikoloz Gagua — MoF, Deputy Minister
  - Shota Gunia — MoF, Division of Fiscal Risks Management
  - Maia Lavrinenko — MoF, Division of Fiscal Risks Management
  - Elene Chkheidze — MoF, Division of Fiscal Risks Management
  - Ana Chabashvili — MoF, Division of Fiscal Risks Management
  - Mirza Gelashvili — MoF, Head of Macroeconomic Analysis and Fiscal Policy Planning Department
  - Pridon Aslanikashvili — MoF, Deputy Head of Macroeconomic Analysis and Fiscal Policy Planning Department
  - Ekaterine Guntsadze — MoF, Head of Budget Department
  - Natia Gulua — MoF, Deputy Head of Budget Department

*IMF | Technical Report – Georgia GFS for SOEs*

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_Source: https://www.imf.org/-/media/files/publications/tar/2024/english/tarea2024045.pdf_