## _cr06361

## Source details

**Canonical URL:** [_cr06361](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06361.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06361.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06361.pdf.json)

---

### The Poverty Reduction Strategy Paper Progress Report (PRSP Progress Report) — Overview and progress
- Confirms government commitment to PRSP objectives and reports on implementation over the last 18 months.
- The PRSP Progress Report is also known in Georgia as the Economic Development and Poverty Reduction Program Progress Report (EDPRP Progress Report) and is the second Annual Progress Report (APR) on the poverty reduction strategy.
- Staffs’ role: Joint Staff Advisory Note (JSAN) discusses implementation to date and provides advice on key priorities to strengthen the EDPRP.

### Macroeconomic performance and policy stance — Findings and staff recommendations
- Findings:
  - GDP growth was 9.3 percent in 2005.
  - GDP growth is expected to slow in 2006 to around 7.5 percent, partly due to external shocks.
  - Inflation remained in single digits in 2005 but accelerated during 2006, reaching 14.5 percent as of end-July and declining to 13.4 percent at end-August.
  - Government fiscal stance: targeting a deficit of 2.5 percent of GDP in 2006.
  - Monetary stance: reducing the target 2006 growth rate of reserve money from 25 percent to 15 percent.
- Staff comments and recommendations:
  - Staffs of IDA and the IMF support the APR’s macroeconomic thrust but note the APR lacks an analysis of the causes of the 2006 inflation upswing.
  - Staffs view the sharp increase in inflation during the first half of 2006 as mainly driven by rapid money growth and recommend spelling out how the government and NBG will limit money growth to non-inflationary levels.
  - The APR presents limited medium-term macroeconomic parameters beyond:
    - an inflation target of 5–6 percent;
    - international reserve coverage equivalent to 2.5 months of imports;
    - GDP growth of 7.5 percent.
  - Staffs recommend presenting a more comprehensive macroeconomic framework (including the external position) and performing macroeconomic stress tests for external vulnerabilities and political shocks.
  - Staffs request more detail on how the NBG intends to balance stabilizing the exchange rate with controlling inflation amid appreciation pressures from private foreign inflows.

### Poverty diagnosis and social protection — Findings, program developments, and staff recommendations
- Findings:
  - A new poverty measurement methodology, developed with World Bank staff and following international standards, improves measurement reliability.
  - Unemployment increased to 13.8 percent in 2005.
  - Overall poverty incidence rose from 35.7 percent in 2004 to 39.4 percent in 2005.
  - Inequality rose: Gini coefficient increased from 0.37 in 2004 to 0.39 in 2005.
  - Poverty declined in the first quarter of 2006 to 33.6 percent, but a solid downward trend is not yet established.
- Social assistance and program developments:
  - Medical insurance program for the extreme poor began implementation in July 2006.
  - Poverty benefit for the extreme poor was introduced in Tbilisi in August 2006 and expanded nationwide in September 2006.
  - APR notes intent to improve targeting, move from in-kind to financial benefits, and address fragmentation to enhance efficiency and fiscal sustainability.
- Staff recommendations:
  - Timely implementation of APR measures to improve social assistance effectiveness is essential to reduce extreme poverty.
  - Make the Georgian Department of Statistics an independent, technically competent public statistical agency and continue strengthening household survey and poverty measurement methodology to enable thorough poverty monitoring.

### Public expenditure management — Findings and staff priorities
- Findings:
  - Milestones toward modern public expenditure management include advances toward program budgeting, greater autonomy of spending units, the MTEF based on Basic Data and Directions 2007–2010, and introduction of the Treasury Single Account.
  - Decentralization reform: organic law on Local Self-Government enacted consolidating 1,000 local units into 70 units; Law on Local Self-Government Budget approved in summer 2006 establishing a formula-based equalization system to be implemented with the 2007 budget.
- Staff recommendations and priorities:
  - Short-term: expand fiscal and transparency rules to the Legal Entities of Public Law (LEPLs).
  - Medium-term priorities:
    - Strengthen medium-term budget planning by fully integrating MTEF goals into annual budget planning.
    - Develop a management structure for public investment.
    - Move to international accounting standards based on GFS-2001.
  - Strengthen line ministries’ capacity and accelerate capacity building at the local level before further decentralization of road management.

### Sectoral policies — Education, health, energy, transport, agriculture, environment
- Education:
  - Substantial progress toward harmonizing with European standards, eradicating corruption, and implementing per-student financing.
  - Transparent university entrance examinations introduced; participation in TIMSS and PIRLS for international comparison.
  - Need to implement per-student financing and optimization plans and introduce performance indicators.
- Health:
  - APR emphasizes revising the Basic Benefit Package (BBP) and addressing primary health care needs.
  - APR details investment needs for primary health care and maternal and child health facilities.
  - Staffs urge identification of hospital infrastructure investment needs and financing requirements of BBP and SBP, and inclusion of health indicators (infant and under-five mortality, HIV/AIDS) in future APRs.
- Energy:
  - Continued improvements: largely 24 hours’ power supply through winter 2005/06 except for January 2006 interruption.
  - Financial flows improved via better collections and investments; domestic upstream providers still receive inadequate financial flows.
  - Government introduced large tariff increases in June 2006 and a life line program to protect vulnerable groups; privatization is expected to provide further discipline.
  - Staffs note tariff increases and privatization may not fully solve sector problems; need for competent regulation, private operator investment, and financing for transmission, hydropower, and natural gas investment needs to improve energy security.
- Transport:
  - Simplification of regulatory and administrative frameworks; consolidation of three regulatory administrations.
  - Increased spending on road rehabilitation and development noted; need for monitoring and possible revisions of the regulatory framework and public reporting systems.
  - Railways: technical assessment completed; staffs recommend market demand analysis and exploring private sector participation.
  - Motor transport: administrative transit procedure simplifications; revised regulations should ensure sustainability and safety.
  - Air traffic: Tbilisi and Batumi airports reconstructed and run by private management; future reforms should focus on civil aviation licensing law and Air Traffic Control organization, pricing, and financing.
  - Maritime: private-sector involvement via concession contracts for Batumi and Poti ports.
- Agriculture:
  - Deregulation progress accompanied by strengthened food safety measures.
  - Implementation requires retraining of regulatory staff and engagement of private service providers; need for training in sanitary and phytosanitary protection, food safety, and quality management.
  - Further work needed on irrigation and drainage sub-sector reform and on rural financing and rural credit unions.
- Environment:
  - Establishment of a governmental commission to strengthen coordination for sustainable development.
  - Good policy and institutional framework relative to peers, but needs stronger implementation, enforcement, and reporting of outcome indicators.

### Transparency, accountability, and business climate — Findings and staff recommendations
- Findings:
  - Impressive progress in curbing corruption and improving the business climate, including prosecution of high-profile former officials, civil service retrenchment with pay rises, and reductions in extortion by traffic police.
  - Tax and customs reforms: new tax code significantly reduced the number of taxes; reorganization and re-staffing of tax and customs offices; adoption of a new law on financial amnesty.
  - EBRD-World Bank Business Environment and Economic Performance Survey of 2005: Georgia had the largest improvement in curbing corruption in 2002–2005 among 27 Europe and Central Asia countries.
  - Business regulatory improvements:
    - Minimum capital requirement for limited liability companies reduced from 2,000 to 200 Lari.
    - New Law on Customs Tariffs effective on September 1 reduced the number of tariff rates from 16 to 3 and established a very low average weighted tariff rate of 1.5 percent.
    - New Labor Code described as one of the most liberal in Europe and Central Asia.
  - World Bank’s Doing Business 2007 indicators rank Georgia as the number one reformer in the world.
- Staff recommendations:
  - Focus next steps on implementing long-lasting institutional changes, improving judiciary functioning, and ensuring effective implementation of regulatory reforms to realize their benefits.

### Financial intermediation and banking sector risks — Findings and staff priorities
- Findings:
  - The APR records rapid development of the banking sector.
  - Credit to the private sector increased by around 80 percent in 2005, a pace that continued in the first half of 2006.
- Staff priorities to address risks:
  - Upgrade banking supervisory policy.
  - Strengthen implementation of Basel Core Principles, particularly for the Fit and Proper Criteria for bank administrators and large shareholders.
  - Strengthen banking sector transparency.
  - Continue to close or merge commercial banks that do not comply with prudential regulations.

### Privatization transparency and use of proceeds — Staff guidance
- Findings:
  - APR highlights progress in privatization but notes more detailed information would have been useful on the transparency and fairness of the process.
  - More extensive advertising could have made the privatization more transparent.
- Staff guidance on use of proceeds:
  - Continue to use part of the proceeds to strengthen the weak international reserve position.
  - Invest some money for capital projects whose selection should be guided by a transparent public investment plan.

### Participation, coordination, and monitoring — Findings and recommendations
- Consultations with civil society:
  - APR benefited from consultations with civil society, but a more systematic approach would have been desirable.
  - Authorities carried out extensive consultations in several areas including customs reform, reforms in education and decentralization.
  - Authorities are encouraged to adopt a more systematic approach toward such consultations.
- Donor coordination:
  - The poverty reduction strategy has been an important vehicle for donor coordination.
  - The government consults regularly with donors, both bilaterally and in the context of the Donors Framework Group, established in support of the preparation and monitoring of the PRSP.
  - Staffs note there is scope for further improving donor coordination.
- Monitoring and reporting:
  - Authorities made progress in adopting a modern methodology for measurement of poverty.
  - Monitoring of macroeconomic goals will be facilitated by the decision to transfer the main responsibility for balance of payments statistics to the NBG.
  - The credibility of the Georgian Statistics Department would be strengthened if it became an independent technical body.
  - Authorities are encouraged to accelerate efforts to develop performance indicators in the context of the MTEF and to report regularly to the public about the performance.

### Conclusion — Key priorities and policy recommendations
- Implementation assessment:
  - Over the past 18 months the implementation of Georgia’s poverty reduction strategy has proceeded well, with impressive achievements in curbing corruption, improving the business climate, and continued improvement in public finances.
  - The coming years’ challenge is to maintain reform momentum and to translate recent achievements into lasting institutional change.
- Particular emphasis should be given to:
  - Enhancing macroeconomic management:
    - Resolve conflicts between exchange rate and price stability by a clear focus on inflation.
    - Limit the NBG’s foreign exchange interventions to smoothing short-term fluctuations.
    - Improvements in the business climate should attract more foreign investment over the medium term and help reduce external vulnerabilities.
    - In the interim, prudent fiscal policies should limit pressures on international reserves and keep external debt on a declining path.
  - Implementing the new legislative framework:
    - New legislation needs to be implemented effectively to realize reform benefits.
    - Developing implementation capacity across different levels of government and public sector areas requires a systematic approach to building an efficient and accountable public administration.
  - Improving the effectiveness of public expenditure policies:
    - The MTEF needs further development and closer linkage with the Basic Data and Directions, the PRSP, and the annual budget and supplements.
    - With public consumption growing rapidly thanks to strong tax collections, improving efficiency and effectiveness in the use of public resources is a priority.
    - This requires strengthening technical skills for the analysis of public investment projects and developing comprehensive performance indicators for public spending.
  - Enhancing the efficiency of infrastructure spending:
    - Priority in meeting infrastructure needs should be determined on the basis of robust technical and economic criteria within a long-term vision.
  - Supplementing pro-growth policies with an effective social safety net:
    - Reforms are needed to address fragmentation of the system and to enhance targeting so resources reach those that need them most.
  - Broadening improvements in governance by judicial reform:
    - Strengthen governance through restructuring the legal and judicial system, ensuring professional competency, and strengthening independence.
  - Fostering participation of civil society in all dimensions of the reform strategy.

*Source: The Poverty Reduction Strategy Paper Progress Report (PRSP Progress Report), Joint Staff Advisory Note summarizing the EDPRP Progress Report (August 2006).*

### 1. The Poverty Reduction Strategy Paper Progress Report (PRSP Progress Report,

### The Poverty Reduction Strategy Paper Progress Report (PRSP Progress Report)

### Overview and progress
- Confirms government commitment to PRSP objectives and reports on implementation over the last 18 months.
- The PRSP Progress Report is also known in Georgia as the Economic Development and Poverty Reduction Program Progress Report (EDPRP Progress Report) and is the second Annual Progress Report (APR) on the poverty reduction strategy.
- Staffs’ role: Joint Staff Advisory Note (JSAN) discusses implementation to date and provides advice on key priorities to strengthen the EDPRP.

### Macroeconomic performance and policy stance
Findings:
- GDP growth was 9.3 percent in 2005.
- GDP growth is expected to slow in 2006 to around 7.5 percent, partly due to external shocks.
- Inflation remained in single digits in 2005 but accelerated during 2006, reaching 14.5 percent as of end-July and declining to 13.4 percent at end-August.
- Government fiscal stance: targeting a deficit of 2.5 percent of GDP in 2006.
- Monetary stance: reducing the target 2006 growth rate of reserve money from 25 percent to 15 percent.

Staff comments and recommendations:
- Staffs of IDA and the IMF support the APR’s macroeconomic thrust but note the APR lacks an analysis of the causes of the 2006 inflation upswing.
- Staffs view the sharp increase in inflation during the first half of 2006 as mainly driven by rapid money growth and recommend spelling out how the government and NBG will limit money growth to non-inflationary levels.
- The APR presents limited medium-term macroeconomic parameters beyond:
  - an inflation target of 5–6 percent;
  - international reserve coverage equivalent to 2.5 months of imports;
  - GDP growth of 7.5 percent.
- Staffs recommend presenting a more comprehensive macroeconomic framework (including the external position) and performing macroeconomic stress tests for external vulnerabilities and political shocks.
- Staffs request more detail on how the NBG intends to balance stabilizing the exchange rate with controlling inflation amid appreciation pressures from private foreign inflows.

### Poverty diagnosis and social protection
Findings:
- A new poverty measurement methodology, developed with World Bank staff and following international standards, improves measurement reliability.
- Unemployment increased to 13.8 percent in 2005.
- Overall poverty incidence rose from 35.7 percent in 2004 to 39.4 percent in 2005.
- Inequality rose: Gini coefficient increased from 0.37 in 2004 to 0.39 in 2005.
- Poverty declined in the first quarter of 2006 to 33.6 percent, but a solid downward trend is not yet established.

Social assistance and program developments:
- Medical insurance program for the extreme poor began implementation in July 2006.
- Poverty benefit for the extreme poor was introduced in Tbilisi in August 2006 and expanded nationwide in September 2006.
- APR notes intent to improve targeting, move from in-kind to financial benefits, and address fragmentation to enhance efficiency and fiscal sustainability.

Staff recommendations:
- Timely implementation of APR measures to improve social assistance effectiveness is essential to reduce extreme poverty.
- Make the Georgian Department of Statistics an independent, technically competent public statistical agency and continue strengthening household survey and poverty measurement methodology to enable thorough poverty monitoring.

### Public expenditure management
Findings:
- Milestones toward modern public expenditure management include advances toward program budgeting, greater autonomy of spending units, the MTEF based on Basic Data and Directions 2007–2010, and introduction of the Treasury Single Account.
- Decentralization reform: organic law on Local Self-Government enacted consolidating 1,000 local units into 70 units; Law on Local Self-Government Budget approved in summer 2006 establishing a formula-based equalization system to be implemented with the 2007 budget.

Staff recommendations and priorities:
- Short-term: expand fiscal and transparency rules to the Legal Entities of Public Law (LEPLs).
- Medium-term priorities:
  - Strengthen medium-term budget planning by fully integrating MTEF goals into annual budget planning.
  - Develop a management structure for public investment.
  - Move to international accounting standards based on GFS-2001.
- Strengthen line ministries’ capacity and accelerate capacity building at the local level before further decentralization of road management.

### Sectoral policies — education, health, energy, transport, agriculture, environment
Education:
- Substantial progress toward harmonizing with European standards, eradicating corruption, and implementing per-student financing.
- Transparent university entrance examinations introduced; participation in TIMSS and PIRLS for international comparison.
- Need to implement per-student financing and optimization plans and introduce performance indicators.

Health:
- APR emphasizes revising the Basic Benefit Package (BBP) and addressing primary health care needs.
- APR details investment needs for primary health care and maternal and child health facilities.
- Staffs urge identification of hospital infrastructure investment needs and financing requirements of BBP and SBP, and inclusion of health indicators (infant and under-five mortality, HIV/AIDS) in future APRs.

Energy:
- Continued improvements: largely 24 hours’ power supply through winter 2005/06 except for January 2006 interruption.
- Financial flows improved via better collections and investments; domestic upstream providers still receive inadequate financial flows.
- Government introduced large tariff increases in June 2006 and a life line program to protect vulnerable groups; privatization is expected to provide further discipline.
- Staffs note tariff increases and privatization may not fully solve sector problems; need for competent regulation, private operator investment, and financing for transmission, hydropower, and natural gas investment needs to improve energy security.

Transport:
- Simplification of regulatory and administrative frameworks; consolidation of three regulatory administrations.
- Increased spending on road rehabilitation and development noted; need for monitoring and possible revisions of the regulatory framework and public reporting systems.
- Railways: technical assessment completed; staffs recommend market demand analysis and exploring private sector participation.
- Motor transport: administrative transit procedure simplifications; revised regulations should ensure sustainability and safety.
- Air traffic: Tbilisi and Batumi airports reconstructed and run by private management; future reforms should focus on civil aviation licensing law and Air Traffic Control organization, pricing, and financing.
- Maritime: private-sector involvement via concession contracts for Batumi and Poti ports.

Agriculture:
- Deregulation progress accompanied by strengthened food safety measures.
- Implementation requires retraining of regulatory staff and engagement of private service providers; need for training in sanitary and phytosanitary protection, food safety, and quality management.
- Further work needed on irrigation and drainage sub-sector reform and on rural financing and rural credit unions.

Environment:
- Establishment of a governmental commission to strengthen coordination for sustainable development.
- Good policy and institutional framework relative to peers, but needs stronger implementation, enforcement, and reporting of outcome indicators.

### Transparency, accountability, and business climate
Findings:
- Impressive progress in curbing corruption and improving the business climate, including prosecution of high-profile former officials, civil service retrenchment with pay rises, and reductions in extortion by traffic police.
- Tax and customs reforms: new tax code significantly reduced the number of taxes; reorganization and re-staffing of tax and customs offices; adoption of a new law on financial amnesty.
- EBRD-World Bank Business Environment and Economic Performance Survey of 2005: Georgia had the largest improvement in curbing corruption in 2002–2005 among 27 Europe and Central Asia countries.
- Business regulatory improvements:
  - Minimum capital requirement for limited liability companies reduced from 2,000 to 200 Lari.
  - New Law on Customs Tariffs effective on September 1 reduced the number of tariff rates from 16 to 3 and established a very low average weighted tariff rate of 1.5 percent.
  - New Labor Code described as one of the most liberal in Europe and Central Asia.
- World Bank’s Doing Business 2007 indicators rank Georgia as the number one reformer in the world.

Staff recommendations:
- Focus next steps on implementing long-lasting institutional changes, improving judiciary functioning, and ensuring effective implementation of regulatory reforms to realize their benefits.

*Source: The Poverty Reduction Strategy Paper Progress Report (PRSP Progress Report), Joint Staff Advisory Note summarizing the EDPRP Progress Report (August 2006).*

### 23. While the increase in financial intermediation stimulates economic growth, the

### _cr06361 - 23. While the increase in financial intermediation stimulates economic growth, the

### Financial intermediation and banking sector risks
- The APR records rapid development of the banking sector.
- Credit to the private sector increased by around 80 percent in 2005, a pace that continued in the first half of 2006.
- These developments are not without risks and underline the urgency of implementing the NBG’s structural reform agenda, in particular:
  - upgrading banking supervisory policy;
  - strengthening implementation of Basel Core Principles, particularly for the Fit and Proper Criteria for bank administrators and large shareholders;
  - strengthening banking sector transparency;
  - continuing to close or merge commercial banks that do not comply with prudential regulations.

### Privatization transparency and use of proceeds
- The APR highlights progress in privatization but notes more detailed information would have been useful on the transparency and fairness of the process.
- More extensive advertising could have made the privatization more transparent.
- Staffs urge the authorities to manage and plan carefully the use of privatization receipts.
- Recommended uses of proceeds:
  - continue to use part of the proceeds to strengthen the weak international reserve position;
  - invest some money for capital projects whose selection should be guided by a transparent public investment plan.

### Participation, coordination, and monitoring
- Consultations with civil society:
  - The APR benefited from consultations with civil society, but a more systematic approach would have been desirable.
  - Authorities carried out extensive consultations in several areas including customs reform, reforms in education and decentralization.
  - Authorities are encouraged to adopt a more systematic approach toward such consultations.
- Donor coordination:
  - The poverty reduction strategy has been an important vehicle for donor coordination.
  - The government consults regularly with donors, both bilaterally and in the context of the Donors Framework Group, established in support of the preparation and monitoring of the PRSP.
  - Staffs note there is scope for further improving donor coordination.
- Monitoring and reporting:
  - Authorities made progress in adopting a modern methodology for measurement of poverty.
  - Monitoring of macroeconomic goals will be facilitated by the decision to transfer the main responsibility for balance of payments statistics to the NBG.
  - The credibility of the Georgian Statistics Department would be strengthened if it became an independent technical body.
  - Authorities are encouraged to accelerate efforts to develop performance indicators in the context of the MTEF and to report regularly to the public about the performance.

### Conclusion — key priorities and policy recommendations
- Implementation assessment:
  - Over the past 18 months the implementation of Georgia’s poverty reduction strategy has proceeded well, with impressive achievements in curbing corruption, improving the business climate, and continued improvement in public finances.
  - The coming years’ challenge is to maintain reform momentum and to translate recent achievements into lasting institutional change.
- Particular emphasis should be given to the following areas:
  - Enhancing macroeconomic management:
    - Resolve conflicts between exchange rate and price stability by a clear focus on inflation.
    - Limit the NBG’s foreign exchange interventions to smoothing short-term fluctuations.
    - Improvements in the business climate should attract more foreign investment over the medium term and help reduce external vulnerabilities.
    - In the interim, prudent fiscal policies should limit pressures on international reserves and keep external debt on a declining path.
  - Implementing the new legislative framework:
    - New legislation needs to be implemented effectively to realize reform benefits.
    - Developing implementation capacity across different levels of government and public sector areas requires a systematic approach to building an efficient and accountable public administration.
  - Improving the effectiveness of public expenditure policies:
    - The MTEF needs further development and closer linkage with the Basic Data and Directions, the PRSP, and the annual budget and supplements.
    - With public consumption growing rapidly thanks to strong tax collections, improving efficiency and effectiveness in the use of public resources is a priority.
    - This requires strengthening technical skills for the analysis of public investment projects and developing comprehensive performance indicators for public spending.
  - Enhancing the efficiency of infrastructure spending:
    - Priority in meeting infrastructure needs should be determined on the basis of robust technical and economic criteria within a long-term vision.
  - Supplementing pro-growth policies with an effective social safety net:
    - Reforms are needed to address fragmentation of the system and to enhance targeting so resources reach those that need them most.
  - Broadening improvements in governance by judicial reform:
    - Strengthen governance through restructuring the legal and judicial system, ensuring professional competency, and strengthening independence.
  - Fostering participation of civil society in all dimensions of the reform strategy.

*Source: _cr06361 - 23. While the increase in financial intermediation stimulates economic growth,*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06361.pdf_