## _cr08328 ## Source details **Canonical URL:** [_cr08328](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08328.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08328.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08328.pdf.json) --- ### Executive Summary — program request, objectives, and financing - Program request: 18-month Stand-By Arrangement (SBA) for $750 million; constitutes exceptional access. - Exceptional access rationale: Georgia’s quota is SDR 150.3 million (about $236 million); request would exceed limits of 100 percent of quota annually and 300 percent of quota cumulatively (net of scheduled repurchases). - Immediate rationale: address balance of payments financing needs after early-August armed conflict and loss of investor confidence. - Phasing: make significant resources available upon approval to replenish international reserves; authorities intend to draw on the initial purchase; decisions on other purchases subject to market developments. - Main objectives: - Replenish international reserves and restore investor confidence to sustain private capital inflows. - Limit deterioration in external accounts via containing the fiscal deficit, maintaining a cautious monetary stance, and strengthening the financial sector. - Avoid liquidity disruptions and accommodate higher fiscal spending on relief and reconstruction while retaining pre-conflict medium-term policy direction. - Available financing for 2008–09: $500 million Eurobond proceeds, privatization receipts, and anticipated concessional loans and grants (amount uncertain) to be accommodated within fiscal targets. ### Immediate conflict impact and observed effects - Physical damage: authorities tentatively assessed civilian infrastructure damage at about $1 billion. - Reserve and market effects: - Gross international reserves fell by $330 million (23 percent) between August 6 and August 31; reserves were $1.5 billion (2.5 months of imports) by end-July 2008 after a $104 million increase earlier. - Sovereign bond spreads rose to a peak of 775 basis points during the conflict (240 points higher than pre-conflict level) and remained over 700 basis points thereafter. - Standard and Poor’s and Fitch lowered Georgia’s sovereign and banks’ external debt ratings by one notch. - Banking and deposit effects: - Bank deposits declined by about 400 million lari (14 percent). - Demand for foreign exchange increased and interbank lending declined substantially. - Maturing external liabilities in the next 12 months estimated at $600 million, about 13 percent of total liabilities. - Immediate policy actions (selected): - Pegged the exchange rate temporarily and intervened heavily to meet foreign exchange demand. - Declared one-day bank holiday on August 12; imposed temporary limits on deposit withdrawals and new credit operations (now lifted). - Waived reserve requirements for two consecutive periods; redeemed NBG securities before maturity. - Activated uncollateralized lending facility in lari at 20 percent penalty rate up to a limit of $200 million (three banks used the facility). - Lowered NBG policy rate by 100 basis points. ### Macroeconomic background and projections - Pre-conflict performance: - Real GDP growth: 12½ percent in 2007; 9¼ percent (year-on-year) in Q1 2008. - Net private inflows: $2.2 billion (22 percent of GDP) in 2007; $1.5 billion in first half of 2008. - Current account deficit: 20 percent of GDP in 2007; about 26 percent in H1 2008. - REER: lari appreciated by 13 percent vis-à-vis the U.S. dollar during first seven months of 2008. - Inflation: peaked at 12¼ percent in March 2008; slowed to 9¾ percent in July 2008. - Gross international reserves: $1,526 million (with SBA; end-1H data); NIR stock at program exchange rate GEL 1.41 = $1 was $1,060 million as of end-June 2008 (TMU note). - Program baseline projections (selected): - Real GDP growth: 3½ percent in 2008 (compared to 9 percent projected before the conflict); 4 percent in 2009; 6 percent in 2010. - Inflation: 8 percent end-2008 and remain at 8 percent in 2009. - Current account deficit: about 20¾ percent of GDP in 2008; 18¾ percent in 2009. - Gross international reserves without Fund support: $920 million by end-2008 and $1,080 million by end-2009. - Gross international reserves with SBA: $1,270 million by end-2008 and $1,755 million by end-2009 (equivalent to 2.6 months of imports, 137 percent of projected reserve money, and 51 percent of projected broad money). ### Balance of payments shock, private inflows, and financing gaps - Staff and authorities project private inflows: - Decline to $313 million in second half of 2008 (from $1,531 million in Jan-Jun prelim.); recover to $1,825 million in 2009. - FDI: 857 ; 380 ; 1,198 (Jan-Jun prelim. ; 1/Jul-Dec proj. ; 2009 proj. in millions of USD as shown). - Non-FDI flows, net: 673 ; -676 ; 28 (same series). - Projected cumulative BOP gap: about $1.2 billion during 2008–09 (size subject to high uncertainty). - Box 2 drivers (second half of 2008 financing gap $550 million; 2009 BOP gap $650 million): - Short-term capital reversal ~ $70 million net outflow implying reversal of about $700 million relative to H1. - FDI decline of $450–$500 million in second half relative to first half; net BOP impact of FDI shortfall ~ $200 million. - SBA disbursement assumed: $350 million in 2008 to help reserves; SBA expected to fill about 60 percent of 2008–09 financing gap, remainder from donors. - Text table current account (in millions of USD): -1,549 (Jan-Jun prelim.) ; -1,208 (1/Jul-Dec proj.) ; -2,618 (2009 proj.) ### Fiscal policy stance, targets, and financing - 2008 outturns before conflict: fiscal deficit reached 4½ percent of GDP in 2007 and 6 percent in first half of 2008. - Authorities’ plan: - Reduce current expenditures to free resources for relief and reconstruction. - Increase public savings from 0.3 percent of GDP in first half of 2008 to 1.7 percent in second half and 2.9 percent in 2009. - Defense spending in second half of 2008 expected to drop to less than half of first half spending. - Targets: - Overall fiscal deficit set to increase to around 6 percent of GDP in 2008 and decline to 3¾ percent in 2009. - Adjustors: up to 2 percent of GDP in 2008 and 3 percent of GDP in 2009 if concessional donor financing exceeds declared pre-conflict commitments. - Financing sources: - Privatization proceeds and use of government deposits; Q4 2008 plan to use $130 million of Eurobond proceeds deposited in an NBG account; in 2009 use $370 million remainder held in sovereign wealth funds. - U.S. pledged a $1 billion multi-year package (about half identified: $210–$240 million); World Bank identified $30 million budget support; EU, EBRD, and ADB considering pledges; size/pace/composition of donor support not fully defined. - Structural fiscal reforms planned: - Submit organic budget system law; improve medium-term public expenditure strategy; complete tax and customs risk management implementation; strengthen transparency in fiscal accounts. - Fiscal numerical excerpts (consolidated government operations percent of GDP): - Revenue: 26.7, 29.2, 27.7, 26.0 (2006–2009 series). - Total balance: -3.0, -4.7, -6.3, -3.8 (2006–2009 series). - Privatization receipts (percent of GDP): 5.2, 5.2, 3.2, 0.9 (2006–2009 series). ### Monetary policy, exchange rate, and liquidity management - Near-term NBG objectives: meet unusually high liquidity needs of banking system while avoiding excessive reserve loss and stabilizing exchange rate. - Immediate instruments introduced: - 7-day refinancing facility collateralized by government and central bank securities with weekly auction-determined interest rates. - Consideration of unsecured credit facility at penalty rates and possible temporary reduction of reserve requirement to replace waiver. - Exchange rate stance: - Short-term: avoid excessive exchange rate volatility; temporary pegging undertaken to calm markets. - Medium-term: return to a flexible exchange rate as soon as market conditions allow. - Program TMU set exchange rate for program purposes: GEL 1.41 = $1. - Monetary targets and aggregates (selected): - Reserve money growth: 19.2, 25.6, 19.0, 12.0 (2006–2009 shown). - Broad money: 39.3, 49.6, 14.0, 18.0 (2006–2009 shown). - Private credit (12-month growth): 53.4, 68.9, 21.2, 15.2 (2006–2009 shown). - Medium-term aim: prepare for a formal inflation-targeting regime; staff recommends introduction to help anchor inflation. ### Financial sector condition, supervisory response, and LOLR - Pre-conflict and recent indicators (selected): - Dollarization: 60 percent of deposits and 65 percent of lending. - Capital adequacy ratio (2004–2008 series): 18.8, 17.5, 20.6, 16.0, 15.6, 15.7 (table-preserved ordering). - Nonperforming loans (2004–2008 series): 6.2, 3.8, 2.5, 2.6, 3.0, 3.4. - Liquidity ratio (2004–2008 series): 33.3, 36.8, 37.2, 41.5, 33.3, 45.0. - Loans in foreign exchange (percent of total loans): 86.7, 76.2, 73.8, 68.6, 65.9, 64.9. - Vulnerabilities: - Concerns about liquidity and asset quality, high reliance on real estate collateral, maturing external liabilities, and indirect FX exposure. - FSA estimates loan-loss provisioning would have to increase two-fold to bring capital adequacy ratio down to minimum 12 percent. - Supervisory and program actions: - Authorities working with banks on liquidity and solvency plans; plans to be assessed in program reviews. - Program envisages strengthening liquidity provision framework, building FSA capacity and independence, and enhancing NBG–FSA cooperation (memorandum of understanding). - Planned enhancements to the LOLR: refine acceptable collateral, redefine access limits and maturity, ensure emergency liquidity only to solvent/viable banks; revised LOLR finalized by end-December 2008 (structural performance criterion). - FSA to determine that liquidity difficulties are isolated and to exercise oversight over institutions accessing LOLR. ### Debt sustainability, stress tests, and repayment capacity - Staff DSA findings: - Georgia’s external debt is low and will remain sustainable despite conflict impacts. - Public external debt-to-GDP ratio fell to 17½ percent in mid-2008 (from 50 percent in 2000); projected to rise to 26 percent by end-2009 due to Eurobond and SBA drawdowns, then decline over medium term. - Long-term solvency and liquidity indicators remain well below applicable thresholds and resilient to many stress tests; key medium-term risks include large debt service in 2012–13 (Eurobond and SBA repurchases). - Stress-test outcomes (selected exact results): - Simulated $500 million new commercial borrowing over 2008–2009 would raise NPV public external debt-to-GDP to 25 percent in 2009 (5 percentage points above baseline). - One-time 30 percent nominal depreciation relative to baseline in 2009 produces large NPV impacts. - Holding primary balance unchanged from 2008 implies NPV debt-to-revenue ratio approaching 250 percent (flagged as potentially misleading due to one-off 2008 spending). - Repayment capacity and Fund exposure: - Fund credit outstanding stood at SDR 138.9 million (92 percent of quota) as of end-August 2008. - Drawdown of full proposed SBA would add 2½ and 2¼ percentage points to external public debt-to-GDP in 2008 and 2009, respectively. - If fully drawn, projected service under the SBA would average SDR 160 million in 2012–14; total payments to the Fund would average close to SDR 180 million in 2012–14 (compared with about SDR 30 million in recent years). - Staff judges Georgia’s capacity to repay the Fund is strong under baseline but could be substantially impaired if downside risks materialize. ### Program access, conditionality, phasing, and monitoring - Exceptional access summary: - Total proposed access under SBA: SDR 477.1 million (317.4 percent of quota). - Amount available upon Board approval: SDR 161.7 million. - First-year availability: SDR 382.5 million (254 percent of quota) would be made available in the first year (footnote in source). - Arrangement duration: 18 months. - Phasing (SDR mn and percent of quota as scheduled): - 2008 September (Approval): SDR 161.70 — 107.58 percent of quota (purchase upon approval) - 2008 November: SDR 63.10 — 41.98 percent of quota - 2009 February: SDR 63.10 — 41.98 percent of quota - 2009 May: SDR 47.30 — 31.47 percent of quota - 2009 August: SDR 47.30 — 31.47 percent of quota - 2009 November: SDR 47.30 — 31.47 percent of quota - 2010 February: SDR 47.30 — 31.47 percent of quota - Total: SDR 477.10 — 317.43 percent of quota - Conditionality (selected): - Quantitative performance criteria: ceilings/floors on fiscal financing, NBG net international reserves, NBG net domestic assets, contracting new nonconcessional external debt, and nonaccumulation of public external arrears (continuous). - Structural performance criteria: NBG to introduce a LOLR facility; submit to parliament organic budget system law. - Structural benchmarks: FSA and NBG to sign/implement memorandum of understanding; submission to parliament of 2009 state budget with overall deficit ≤ 3¾ percent of GDP (subject to 3 percent adjustor); NBG to develop and publish liquidity management framework; appointment of remaining FSA Board members. - Expected reviews: Quarterly reviews with associated quarterly performance criteria; first reviews scheduled Nov 2008 and Feb 2009. - Reporting and transparency commitments: - MOF to provide IMF monthly details of all new commitments and government guarantees for external borrowing within two weeks of month-end. - Continuous performance criterion on nonaccumulation of external arrears; details of missed payments reported to IMF within one week. ### Program risks, contingency measures, and staff appraisal - Main risks: - Escalation of regional or domestic tensions. - A less benign international economic environment. - Weakening of bank asset quality and reduced access to foreign borrowing. - Greater-than-anticipated slowdown in private capital flows. - Contingent measures authorities stand ready to implement in consultation with Fund staff: - Strengthen monetary and fiscal policies (tighten). - Allow for faster exchange rate depreciation. - Seek additional financing from donors/creditors. - Strengthen bank resolution framework and clarify roles of NBG, FSA, and government for systemic difficulties. - Staff appraisal: - Georgia is well positioned to deal with temporary shock given prior adjustment and reform. - Fund resources intended to replenish reserves, finance 2009 financing gap, catalyze investor confidence, and facilitate donor support. - Program supports fiscal containment, vigilant monetary stance, and financial sector strengthening. - Staff supports avoiding short-term exchange rate volatility but stresses importance of NIR floors and returning to flexible exchange rate; may require raising interest rates further. _Italic: Source: IMF staff report content unit _cr08328 (Executive Summary, Boxes, DSA, and associated sections as provided)._ ### Executive Summary ...................................................................................................... ### Executive Summary ### Program request and rationale - The Georgian authorities requested an 18-month, $750 million Stand-By Arrangement (SBA), which constitutes exceptional access. - Exceptional access rationale: Georgia’s quota is SDR 150.3 million (about $236 million); the request would exceed limits of 100 percent of quota annually and 300 percent of quota (net of scheduled repurchases) cumulatively. - The request responds to balance of payments financing needs following the early-August armed conflict and the resulting loss of investor confidence. - Phasing is designed to make significant resources available upon approval to replenish international reserves; the authorities intend to draw on the initial purchase. Decisions on other purchases will be subject to market developments. ### Main objectives of the program - Replenish international reserves and help restore investor confidence to sustain private capital inflows that have been critical to Georgia’s growth performance in recent years. - Limit deterioration in external accounts by: - Containing the fiscal deficit. - Maintaining a cautious monetary stance. - Further strengthening the financial sector. - Focus on avoiding liquidity disruptions and accommodating higher fiscal spending on relief and reconstruction while retaining the medium-term direction of policies in place before the conflict. ### Financing context - In addition to Fund resources, Georgia is likely to receive financial assistance from multilateral and bilateral donors and creditors to support reconstruction. - Currently available financing for 2008–09 includes the proceeds of the $500 million Eurobond issued this year, and privatization receipts. - Concessional loans and grants from partners—an amount still uncertain—are expected to finance further reconstruction needs and will be accommodated within the fiscal targets. ### Fiscal policy - Plan: reduce current expenditures to free resources for relief and reconstruction. - Fiscal outturns before the conflict: fiscal deficit reached 4½ percent of GDP in 2007 and 6 percent in the first half of 2008. - Successive budget supplements and higher defense outlays had eroded the fiscal stance relative to original budgets; increased expenditure was largely matched by strong revenue performance and high privatization proceeds. ### Monetary policy - Challenge: provide sufficient liquidity to the banking system while stabilizing the exchange rate and avoiding excessive loss of international reserves. - Short-term approach: avoid excessive volatility in the exchange rate. - Medium-term objective: return to a flexible exchange rate regime as soon as market conditions allow. - Prior to the conflict, the NBG increased interest rates aggressively (by 6 percentage points on 90-day CDs up to July) and allowed significant lari appreciation. These policies reduced annual growth of broad money and credit to 27 percent and 48 percent, respectively, in July (compared with 50 percent and 70 percent at end-2007). ### Financial sector measures - Banking system: resilient to current pressures but concerns about liquidity and asset quality. - Supervisory actions: authorities working with banks on plans to assess vulnerabilities and mitigate risks. - Program envisages: - Actions to strengthen the framework for providing liquidity. - Build up capacity of the Financial Supervision Agency (FSA). - Strengthen FSA independence. - Enhance cooperation between the central bank and the FSA. - Pre-conflict financial indicators (selected): - Dollarization: 60 percent of deposits and 65 percent of lending. - Capital adequacy ratio: 2008 Mar./Jun. series included values such as 15.7, 16.0, 20.6, 17.5, 18.8 (table format preserved). - Nonperforming loans: values listed included 3.4, 3.0, 2.6, 2.5, 3.8, 6.2 (2004–2008 series). - Liquidity ratio: values listed included 33.3, 36.8, 37.2, 41.5, 33.3, 45.0 (2004–2008 series). ### Economic background and vulnerabilities - Growth and inflows: - Real GDP grew by 12½ percent in 2007 and by 9¼ percent (year-on-year) in Q1 2008. - Net private inflows: $2.2 billion (22 percent of GDP) in 2007 and $1.5 billion in the first half of 2008. - External position: - Current account deficit: 20 percent of GDP in 2007 and about 26 percent in H1 2008. - Gross international reserves increased by $104 million to $1.5 billion (2.5 months of imports) by end-July 2008. - REER appreciation: lari appreciated by 13 percent vis-à-vis the U.S. dollar during the first seven months of 2008. - Inflation: peaked at 12¼ percent in March 2008 before slowing to 9¾ percent in July 2008. - Public debt and borrowing: - $500 million five-year Eurobond issued in April 2008 at a spread of 474 basis points (yield around 7.5 percent); about three-fourths of proceeds invested in sovereign wealth funds and $130 million deposited in a government account in the NBG. - Public external debt-to-GDP ratio fell to 17½ percent in mid-2008 (from 50 percent of GDP in 2000). ### Initial consequences of the conflict (observed effects) - Estimated physical damage to civilian infrastructure tentatively assessed by authorities at about $1 billion. - Immediate needs: resettlement of internally displaced persons, address interruptions in transportation, electricity and gas supplies, rebuilding infrastructure, remove bottlenecks impeding private sector activities. - Financial market effects: - Gross international reserves fell by $330 million (23 percent) between August 6 and August 31, reflecting NBG intervention (sales of $187 million vs. net purchases of $360 million in Jan–Jul), temporary waiver of reserve requirements on foreign exchange deposits, and government imports. - Bank deposits declined by about 400 million lari (14 percent); both corporations and households contributed to withdrawals; demand for foreign exchange increased and interbank lending declined substantially. - Sovereign bond spreads rose to a peak of 775 basis points during the conflict (240 points higher than pre-conflict level) and remained over 700 basis points thereafter. - Rating actions: Standard and Poor’s and Fitch lowered Georgia’s sovereign and banks’ external debt ratings by one notch. ### Program risks and contingency - Main risks: - Escalation of regional or domestic tensions. - A less benign international economic environment. - Weakening of bank asset quality. - Reduced access to foreign borrowing. - Authorities’ contingency stance: - Prepared to act quickly by strengthening policies and mobilizing financing if adverse scenarios emerge. - Will consult closely with the Fund, including in the context of quarterly program reviews. ### Program access, monitoring, and capacity to repay - The SBA request represents exceptional access relative to Georgia’s quota and existing Fund credit outstanding: Fund credit outstanding stood at SDR 138.9 million (92 percent of quota) as of end-August 2008. - The program is front-loaded to address urgent reserve needs and to support restoration of market confidence; further purchases conditional on developments. *Source: Executive Summary, _cr08328 - Executive Summary* ### Box 1. Georgia—Actions to Address the Temporary Liquidity Needs ### Box 1. Georgia—Actions to Address the Temporary Liquidity Needs ### Immediate authorities' actions (post-conflict) - Pegged the exchange rate, on a temporary basis, to calm the market, and intervened heavily in the market to fully meet the demand for foreign exchange. - Declared a one-day bank holiday on August 12 because of a shortage of dollar banknotes. - Imposed temporary limits on deposit withdrawals and new credit operations (now lifted). Banks resumed normal operations at end-August. - Waived the reserve requirements for two consecutive periods with the intention of restoring them gradually. - Redeemed NBG securities before maturity. - Activated an uncollateralized lending facility in lari at a penalty interest rate (20 percent) up to a limit of $200 million for the system. Three banks used the facility. - Lowered the NBG policy rate by 100 basis points to signal readiness to keep banks adequately liquid and the financial system functioning. - The FSA monitored banks daily to identify emerging liquidity pressures, the pace of deposit outflows, and possible relaxation of borrowers’ payment discipline. ### Banking sector condition and immediate risks - Direct damage to the banking sector seems to have been contained but: - Further liquidity shortages and asset quality deterioration are matters of concern. - Banks sharply curtailed lending in response to tightening liquidity conditions. - Credit to construction and mortgages accounts for one-fifth of the system’s credit and has boomed, driven by rising real estate prices; there is high reliance on real estate for loan collateral. - Maturing external liabilities in the next 12 months are estimated at $600 million, about 13 percent of total liabilities. - Early repayment clauses attached to some outstanding external loans may be activated if confidence is not fully restored. ### Balance of payments shock and private inflows (program projections) - Staff and authorities project a sharp slowdown in private inflows (FDI, bank loans, portfolio investment): - Private inflows decline to $313 million in the second half of the year (from $1.5 billion in the first half). - Private inflows recover to $1.8 billion in 2009 (about half of the level expected before the conflict). - Private inflows are projected to recover in 2010 and beyond. - Projected cumulative gap in the balance of payments of about $1.2 billion during 2008–09 (size subject to high uncertainty). - Text Table excerpt (in millions of USD): - Current account (in millions of USD): -1,549 (Jan-Jun prelim.) ; -1,208 (1/Jul-Dec proj.) ; -2,618 (2009 proj.) - Private capital inflows: 1,531 ; 313 ; 1,825 - FDI: 857 ; 380 ; 1,198 - Non-FDI flows, net (bank loans, portfolio investment and other short-term capital): 673 ; -676 ; 28 - Memorandum items: - Gross international reserves (with SBA; in millions of USD): 1,526 ; 1,270 ; 1,755 - Gross international reserves (without SBA; in millions of USD): 1,526 ; 920 ; 1,080 - Note: For the first quarter, official actual data is available. Q2 is based on preliminary estimates. ### Box 2: Sources of the Balance of Payments Gap - A financing gap of $550 million (about 4 percent of 2008 GDP) will emerge in the second half of 2008 because: - A small net outflow (some $70 million) of short-term capital (primarily bank loans and portfolio investment) is projected for the second half of the year — implying a reversal of about $700 million (5½ percent of GDP) compared to the first six months. - FDI is anticipated to decline by $450–$500 million in the second half compared to the first half. The net impact of the shortfall in FDI on the balance of payments––given its high import content––is estimated at around $200 million (1½ percent of GDP). - The current account deficit is projected to narrow (from $1.5 billion in the first half of 2008 to $1.2 billion in the second half). Higher reconstruction imports will broadly offset lower imports associated with the economic slowdown, and remittances are projected to increase. - Whereas gross reserves increased by $165 million in the first half of the year, they are expected to fall by $256 million in the second half notwithstanding the disbursement of $350 million from the SBA. - The $650 million (4¾ percent gap of GDP) BOP financing gap projected for 2009 is based on: - Private capital inflows (including FDI) expected to recover in 2009 to $1.8 billion, but remain well below pre-conflict expectations. - The spending of the $370 million foreign assets of the sovereign wealth funds in 2009 would help lower the financing gap, but the net impact on the BOP would depend on the import content of government spending of these assets. - The current account would narrow somewhat as exports recover and strong remittances offset reconstruction-related imports. - NBG intervention in the foreign exchange market would contribute to the BOP gap. - In contrast to the second half of 2008, the NBG reserves (net of purchases under the SBA) are expected to increase by $160 million in 2009. ### Macroeconomic outlook and reserves - Growth and inflation: - Real GDP growth would slow to 3½ percent in 2008 (compared to 9 percent projected before the conflict) driven by a significant drop in private investment and consumption in the remainder of the year. - Growth would recover to 4 percent in 2009 and 6 percent in 2010, aided by an upturn in inflows and investment for reconstruction. - Inflation would likely decline to 8 percent in end-2008 (as predicted before the conflict), remain at this rate in 2009 and decelerate gradually thereafter. - Current account and reserves: - The external current account deficit would reach about 20¾ percent of GDP in 2008 and narrow to 18¾ percent in 2009. - Gross reserves without Fund support would decline to $920 million (1.5 months of imports) by end-2008 and remain at about this level in 2009. - Use of Fund resources (SBA) would allow reserves to be maintained at $1.27 billion by end-2008 and $1.76 billion by end-2009, equivalent to 2.6 months of imports, 137 percent of projected reserve money, and 51 percent of projected broad money. ### Fiscal policy and financing - Fiscal stance and targets: - Authorities intend to cut current spending to increase public savings from 0.3 percent of GDP in the first half of 2008 to 1.7 percent in the second half and 2.9 percent in 2009. - Defense spending during the second half of 2008 is expected to drop to less than half the spending in the first half of the year. - Tax-to-GDP ratio is expected to decline reflecting cuts in income and dividend tax rates approved recently by parliament. - Overall fiscal deficit is set to increase to around 6 percent of GDP in 2008, and to decline to 3¾ percent in 2009. - Targets include adjustors of up to 2 percent of GDP in 2008 and 3 percent of GDP in 2009 if concessional donor financing exceeds declared pre-conflict commitments. - Financing sources and donor support: - Fiscal deficits will be largely financed by privatization proceeds and use of government deposits, complemented by additional donor financing. - In Q4 2008, the government plans to use $130 million of the Eurobond proceeds deposited in an NBG account, and in 2009 to use the $370 million (remainder of the Eurobond proceeds) held in the sovereign wealth funds. - The U.S. has pledged a $1 billion multi-year package, of which about half has been identified as additions to the Millennium Challenge grants, investment guarantees, humanitarian assistance, and budget support ($210–$240 million); the World Bank has identified additional budget support of $30 million. The EU, EBRD, and ADB are also considering supporting pledges. The size, pace, and composition of donor support are not yet fully defined. - Structural fiscal reforms planned: - Submit to parliament an organic budget system law to lock in rule-based limits on fiscal policy. - Improve the medium-term public expenditure strategy, complete the implementation of a risk management system for tax and customs administration, and strengthen transparency in the fiscal accounts. - Defense spending (Text Table 4 excerpt): - In millions of lari: 689 1,496 1,053 492 1,545 1,000 - In percent of GDP: 5.0 8.8 ...... 8.0 4.6 ### Monetary, exchange rate, and liquidity management policies - Near-term NBG actions: - Focus on meeting unusually high liquidity needs of the banking system. - Introduced a 7-day refinancing facility collateralized by government and central bank securities at interest rates determined in weekly auctions. - Existing stock of collateral in the market is about 165 million lari; authorities are considering an unsecured credit facility at penalty rates to meet additional liquidity shortages and possibly a temporary reduction of the reserve requirement (to replace the current waiver). - An important factor going forward will be banks’ willingness to resume lending to the private sector. - Exchange rate policy stance: - Authorities are determined to avoid excessive reserve loss by reintroducing exchange rate flexibility as soon as the banking system stabilizes. - NBG intervened heavily in the foreign exchange market after the conflict to maintain depositor confidence; as market conditions stabilize (e.g., when deposit outflows stop), the exchange rate will have to adjust to the expected lower supply of foreign exchange. - Prior to the conflict, staff analysis pointed to moderate overvaluation of the real effective exchange rate and warned that the large current account deficit posed risks to external stability. - Liquidity management framework: - The NBG prioritizes developing a well-structured liquidity framework to replace ad-hoc instruments, enhance the efficiency of monetary policy, and strengthen the transmission mechanism in preparation for a formal inflation-targeting regime. ### Debt assessment - Staff’s debt sustainability analysis indicates: - Georgia’s external debt is low and will remain sustainable despite the adverse impact of the conflict. - Public debt will rise in 2008–09 on account of the $500 million Eurobond and new conflict-related borrowing. - Over the long term, debt solvency and liquidity indicators remain well below applicable thresholds and show resiliency to a number of stress tests. - The large projected debt service in 2012–13 is a risk to the debt outlook. *Source: IMF staff report text (Box 1 and associated sections) contained in the provided PDF.* ### 27. Aided by tight prudential requirements, the banking system has been resilient to ### _cr08328 - 27. Aided by tight prudential requirements, the banking system has been resilient to ### Banking system resilience and vulnerabilities - Finding: The banking system has been resilient to current pressures, aided by strong prudential ratios including high liquidity requirements, stringent capital adequacy ratios (12 percent), and higher risk weighting for foreign-currency lending. - Vulnerabilities: - Maturing external liabilities and slow deposit growth could put additional pressure on liquidity and funding if foreign financing remains inaccessible. - Concerns about banks’ indirect foreign exchange rate exposure and asset quality, particularly given large exposure to the real estate sector. - According to the FSA, the banks’ loan-loss provisioning would have to increase two-fold to bring the capital adequacy ratio down to a minimum 12 percent. ### Supervisory response and bank contingency planning - Actions under way: - Supervisory authorities are working with banks on plans to maintain liquidity, preserve asset quality, and meet solvency standards, including, if necessary, by raising additional capital. - Plans will be assessed in the context of subsequent program reviews. - FSA responsibilities and needs: - Ensure banks realistically assess their business position, adequately provision for rising NPLs, and take a conservative approach to collateral valuations amid limited liquidity and falling property prices. - Build up capacity: upgrade offsite supervisory capacities, deepen analysis, and conduct additional bank inspections when issues of concern arise. - Enhance risk management practices by banks and strengthen supervision on a consolidated basis to avoid regulatory arbitrage. - Plans to further enhance independence of the FSA (see paragraph 43 of the MEFP). ### Lender of last resort (LOLR) and central bank coordination - Finding: The NBG’s emergency liquidity provision instruments were effective during recent turbulence. - Planned enhancements to the LOLR: - Refine the type of securities acceptable as collateral. - Redefine access limits and maturity. - Ensure emergency liquidity is provided only to solvent and viable banks. - Institutional roles: - The FSA should determine that liquidity difficulties are isolated and exercise oversight over institutions accessing the LOLR. - Cooperation: NBG and FSA to develop a memorandum of understanding to define roles, responsibilities, and arrangements for information exchange (see paragraph 42 of the MEFP). ### Risks to the program and possible policy responses - Downside risks: - Escalations of regional or domestic tensions or a less benign international economic environment. - Deterioration of investor confidence could add pressures to the capital account; depositor loss of confidence could cause prolonged tight liquidity and credit conditions and worsen credit portfolios, weakening bank soundness. - Contingent measures the authorities stand ready to implement in consultation with Fund staff: - Tighten monetary and fiscal policies. - Allow for faster exchange rate depreciation. - Seek additional financing to respond to a larger-than-anticipated shock. - Need to strengthen bank resolution framework and clarify roles of NBG, FSA, and government if systemic banking difficulties arise. ### Program financing, exceptional access, and conditionality - External financing pressures and exceptional access justification: - The shock has produced large external financing needs already covered by a loss of 23 percent of international reserves (140 percent of quota). - Staff believes Georgia meets the four criteria for exceptional access. - Expected financing contributions: - The SBA is expected to fill about 60 percent of the 2008–09 financing gap, with the remainder from donors. - In 2008, the SBA will cover $350 million of the $550 million financing gap, the World Bank will contribute $30 million, and the U.S. the remaining $170 million. - Note: The U.S. contribution in 2008 may be larger; part of pledges expected to be associated with imports. - Debt and repayment capacity: - Public external debt-to-GDP ratio is projected at 25 percent of GDP by 2010. - Drawdown of the full amount of the proposed SBA would add 2½ and 2¼ percentage points to the external public debt-to-GDP ratio in 2008 and 2009, respectively; includes effect of the Eurobond issue and conflict-related borrowing. - Conclusion: Georgia’s capacity to repay the Fund is strong, but would be substantially impaired if downside risks materialize. - Program conditionality (Box 3 highlights): - Access: SDR 477.1 million. - Phasing: SDR 161.7 million upon Board approval; subsequent two tranches of SDR 63.1 million each could be made available in November 2008 and February 2009; thereafter four equal purchases of SDR 47.3 million on a quarterly basis. - Quantitative performance criteria include ceilings and floors on fiscal financing, NBG net international reserves, NBG net domestic assets, contracting new nonconcessional external debt, and nonaccumulation of public external arrears. - Structural performance criteria include introduction by the NBG of a LOLR facility and submission to parliament of a new organic budget system law. - Structural benchmarks include FSA and NBG to sign and implement a memorandum of understanding; submission to parliament of a state budget for 2009 with an overall deficit of no more than 3¾ percent of GDP (subject to an adjustor for donor-financed reconstruction spending of up to 3 percent of GDP); NBG to develop and publish a liquidity management framework; appointment of remaining FSA Board members. - Expected reviews: Quarterly reviews and quarterly performance criteria. ### Staff appraisal: macroeconomic and policy orientation - Overall assessment: - Georgia is considered well positioned to deal with the temporary shock given prior adjustment and reform. - Fund resources are intended to replenish reserves, finance the 2009 financing gap, and act as a catalyst to boost investor confidence and facilitate donor support. - Policy stance: - Program supports containing the fiscal deficit and maintaining a vigilant monetary stance while strengthening financial sector resilience. - The program targets only a moderate adjustment in the current account in 2008–09 given the temporary nature of the shock. - Fiscal policy guidance: - Reduce current expenditures to free resources for relief and reconstruction; proceed with planned tax burden reductions. - Finance 2008–09 deficits mainly by using resources from the sovereign wealth fund (proceeds from the $500 million Eurobond issue) and privatization receipts; concessional loans and grants from partners expected to finance further reconstruction needs. - Monetary policy guidance: - Balance providing sufficient liquidity to banks with stabilizing the exchange rate and protecting international reserves. - Staff supports avoiding short-term exchange rate volatility but stresses importance of program floors on net international reserves and returning to a flexible exchange rate as market conditions allow; this might require raising interest rates further. - Authorities plan to phase out the reserve requirement waiver introduced after the conflict and to strengthen liquidity management and the LOLR in the first six months of the program. - With expected slowdown in activity, inflation is expected to remain moderate; introduction of an inflation-targeting regime is recommended to help anchor inflation over the medium term. - Financial sector priorities reiterated: - Work with banks to assess vulnerabilities and mitigate risks. - Build FSA capacity, strengthen its independence, and enhance NBG–FSA cooperation. - Improve contingency planning for bank resolution once market uneasiness subsides. *Source: IMF staff report (excerpt).* ### 47. Risks to the program are considerable. Escalations of regional or domestic tensions ### _cr08328 - 47. Risks to the program are considerable. Escalations of regional or domestic tensions ### Major risks to the program - Escalations of regional or domestic tensions and a less benign international economic environment could cause a greater-than-anticipated deterioration of investor confidence and add pressures to the capital account. - A weakening of bank asset quality and reduced access to foreign borrowing is another substantive risk for the macroeconomic outlook and the program. - If these scenarios emerge, the authorities are prepared to act quickly by strengthening policies and mobilizing financing. ### Financial indicators and market signals (selected) - Commercial Banks' External Debt Spreads: shown (in basis points, over comparable U.S. treasuries) for Jan-07 to May-08 for "JP Morgan", "Bank of Georgia", "Halyk Savings Bank" (figure source: Bloomberg). - Commercial Banks' Stock Prices: indexed (Feb. 1, 2007=100) for BoG stock price, MSCI Eastern Europe, Halyk saving banks (Jan-07 to Jul-08). - Sovereign Eurobond Spreads: Georgia (B, S&P), Ukraine (B+, S&P), Pakistan (B, S&P), Dominican Republic (B+, S&P) across Apr-08 to Aug-08 (in basis points, over comparable U.S. treasuries). - BoG vs Georgian Government Eurobond Spreads: series Apr-08 to Aug-08 (in basis points, over comparable U.S. treasuries). ### Monetary indicators (selected) - NBG CD Interest Rates: 7 day and 90 day series (Feb-07 to Jul-08). - NBG Net FX Purchases, Cumulative for the Year (monthly series, Jan–Dec 2006–2008). - Money Growth (Annual growth rate): Broad Money and Reserve Money (Mar-06 to Mar-08 series). - Exchange rates: Lari/US$ and Lari/EURO (Jan-08 to Jul-08; values shown with precision: e.g., 1.4, 1.5, 1.6, 1.7, 2.1, 2.2, 2.3, 2.4). - Bank Credit to the Private Sector (12-month growth, in percent) and Commercial Banks' Credit, Deposits and Foreign Liabilities (12-month growth, in percent) series (Jan-07 to Jul-08). ### Macroeconomic performance and projections (Table 1: Selected Macroeconomic Indicators, 2006–12) - Real GDP growth: 9.4, 12.4, 3.5, 4.0, 6.0, 6.0, 7.0 (2006–2012). - Population (million) 1/: 4.3, 4.4, 4.4, 4.4, 4.4, 4.4, 4.4. - Consumer price index, period average: 9.2, 9.2, 10.0, 7.6, 7.0, 6.0, 6.0. - Consumer price index, end-of-period: 8.8, 11.0, 8.0, 8.0, 6.0, 6.0, 6.0. - GDP per capita (US$): 1,800, 2,324, 2,895, 3,167, 3,592, 4,036, 4,577. - Poverty rate (in percent): 31.0. - Unemployment rate (in percent): 13.6, 13.3. - Investment (percent of GDP): 25.6, 28.1, 23.7, 22.2, 22.4, 24.0, 25.1. - Public: 2.5, 3.4, 3.6, 5.6, 4.0, 4.2, 4.3. - Private: 23.0, 24.7, 20.1, 16.6, 18.4, 19.8, 20.8. - Gross national saving (percent of GDP): 9.7, 8.1, 2.9, 3.5, 6.5, 9.8, 12.7. - Public: 5.9, 4.2, 1.0, 2.9, 3.6, 4.2, 4.2. - Private: 3.7, 3.8, 1.9, 0.6, 2.8, 5.6, 8.5. - Saving-investment balance: -15.9, -20.0, -20.8, -18.7, -15.9, -14.2, -12.4 (percent of GDP). - Consolidated government operations (percent of GDP): - Revenue: 26.7, 29.2, 27.7, 26.0, 25.5, 25.1, 25.0. - Expenses: 20.8, 25.0, 26.6, 23.1, 21.8, 20.9, 20.8. - Operational balance: 5.9, 4.2, 1.0, 2.9, 3.6, 4.2, 4.2. - Capital spending and net lending: 9.0, 9.0, 7.3, 6.7, 5.2, 4.8, 4.5. - Total balance: -3.0, -4.7, -6.3, -3.8, -1.6, -0.6, -0.3. - Total financing (program definition): 3.0, 4.5, 5.9, 3.8, 1.6, 0.6, 0.3. - Privatization receipts: 5.2, 5.2, 3.2, 0.9, 1.0, 0.6, 0.1. - Monetary sector: Reserve money growth: 19.2, 25.6, 19.0, 12.0 (2006–2009 shown). - Broad money (including foreign exch. deposits): 39.3, 49.6, 14.0, 18.0. - Private credit (percent, 12-month growth): 53.4, 68.9, 21.2, 15.2. - External sector: - Exports of goods and services (percent of GDP): 33.1, 31.7, 27.6, 29.2, 30.4, 30.2, 29.4. - Imports of goods and services (percent of GDP): 56.8, 57.8, 53.4, 52.9, 50.5, 48.6, 45.5. - Current account balance (in millions of US$): -1,235, -2,047, -2,757, -2,618, -2,513, -2,510, -2,501. - Current account (percent of GDP): -15.9, -20.0, -20.8, -18.7, -15.9, -14.2, -12.4. - Gross international reserves (in millions of US$): 881, 1,361, 1,270, 1,755, 1,951, 2,080, 2,173. - Gross international reserves (in months of next year's imports): 1.8, 2.3, 2.1, 2.6, 2.7, 2.7, 2.7. - Foreign direct investment (percent of GDP): 13.9, 15.3, 9.3, 8.6, 9.2, 9.2, 8.5. ### Fiscal accounts (selected tables and quarterly detail) - Annual consolidated government operations, 2006–10 (Table 2) provide detailed nominal figures (in millions of lari) and percent-of-GDP ratios for Revenues, Taxes, Current expenditure, Operational balance, Capital spending and net lending, Total balance, Total financing (domestic and external), and Privatization receipts. - Quarterly consolidated government operations, 2008–09 (Table 3) show quarterly flows and projections with nominal GDP memorandum: Annual Projected nominal GDP for 2008 = 19,353; 2009 = 21,737. ### Balance of payments and external financing (Table 4 and Table 9) - Summary Balance of Payments, 2006–12 (Table 4): - Current account balance (in millions of US$): -1,235, -2,047, -2,757, -2,618, -2,513, -2,510, -2,501 (2006–2012). - Trade balance (in millions of US$): -2,019, -2,877, -3,491, -3,520, -3,508, -3,649, -3,684. - Capital and financial account balance (in millions of US$): 1,617, 2,388, 2,152, 2,481, 2,531, 2,701, 2,871. - Foreign direct investment (including privatization receipts) (in millions of US$): 1,076, 1,562, 1,237, 1,198, 1,452, 1,630, 1,714. - Overall balance and reserves adjustments result in gross reserves (end of period) projections: 881, 1,361, 1,270, 1,755, 1,951, 2,080, 2,173 (2006–2012). - External Financing Requirements and Sources, 2006–12 (Table 9): - Total requirements (in millions of US$): -1,418, -2,185, -3,251, -2,331, -2,602, -2,963, -3,238. - Total sources (in millions of US$): 1,418, 2,185, 2,701, 1,680, 2,402, 2,963, 3,238. - Financing gap (in millions of US$): 0, 0, -550, -650, -200, 0, 0. - IMF (SBA) provision in scenario: ......350, 325, 75, ...... (Table notes show IMF (SBA) financing of the gap for specific years). ### External vulnerability indicators (Table 7, selected) - Current account balance (percent of GDP): -15.9, -20.0, -20.8, -18.7, -15.9, -14.2, -12.4, -11.8, -10.6, -9.7 (2006–2015). - External public debt (percent of GDP): 21.9, 17.5, 21.0, 25.9, 24.1, 21.5, 18.4, 15.2, 13.9, 13.1 (2006–2015). - External debt (percent of GDP): 30.0, 30.7, 34.6, 41.1, 39.5, 37.8, 34.7, 31.5, 29.6, 28.9. - Debt service on external debt (in percent of exports of goods and services): 10.5, 8.2, 14.0, 15.3, 15.4, 15.4, 19.3, 29.3, 18.0, 18.3. - Gross international reserves (in millions of USD): 881, 1,361, 1,270, 1,755, 1,951, 2,080, 2,173, 2,094, 2,262, 2,446 (2006–2015). - Gross international reserves (in months of next year's imports): 1.8, 2.3, 2.1, 2.6, 2.7, 2.7, 2.7, 2.4, 2.5, 2.5 (2006–2015). ### Banking sector and prudential indicators (Table 10) - Capital adequacy ratio (in percent): 18.8, 17.5, 20.6, 16.0, 15.6, 15.7 (2004–2008 series). - Nonperforming loans (in percent of total loans): 6.2, 3.8, 2.5, 2.6, 3.0, 3.4. - Specific provisions (in percent of total loans): 4.3, 2.4, 1.7, 1.7, 1.9, 2.2. - Loans in foreign exchange (in percent of total loans): 86.7, 76.2, 73.8, 68.6, 65.9, 64.9. ### Fund support, arrangement, and financing (Table 11 and Letter of Intent excerpts) - Approved 18-month SBA: Associated disbursement on or after September 15, 2008: 161.7 (in millions of SDR). - Subsequent review-based disbursements: 63.1, 63.1, 47.3, 47.3, 47.3, 47.3 (schedule shown with dates and associated disbursements). - Total disbursements under the 18-month SBA (Table 11): 477.1 (in millions of SDR). - Letter of Intent (September 9, 2008) requests a Stand-By Arrangement for September 2008 to March 2010 in the amount of SDR 477.1 million (approximately $750 million), equivalent to 317.4 percent of quota. - Authorities’ statement: "The government believes that the policies set forth in the MEFP are adequate to achieve the objectives of the program, but it is prepared to consider taking other measures that may become appropriate for this purpose, in consultation with the Fund." ### Contingency preparedness and policy stance - Authorities are prepared to act quickly by strengthening policies and mobilizing financing if shocks materialize (regional escalation, investor confidence shock, bank asset quality deterioration, reduced foreign borrowing). - The attached Memorandum of Economic and Financial Policies (MEFP) describes policies and strategies for the next 18 months as the basis for IMF support. - The government emphasizes measures to reassure domestic and foreign business communities to sustain investor confidence following the August conflict and ceasefire. _Italic: Source: IMF staff report content unit _cr08328 - 47. Risks to the program are considerable. Escalations of regional or domestic tensions (extracted from the supplied PDF content)._ ### 1. Since 2004, we have implemented a policy of comprehensive and exemplary ### _cr08328 - 1. Since 2004, we have implemented a policy of comprehensive and exemplary ### Macroeconomic performance and private-sector reform - Since 2004, implemented "a policy of comprehensive and exemplary economic reform" focused on fostering economic growth through private sector investment. - Reforms: eliminated barriers to private sector activity by aggressively deregulating the economy, privatizing most state assets, reducing and simplifying taxes, dramatically liberalizing the trade regime, investing in infrastructure, and significantly reducing bureaucratic barriers and as a result reducing corruption. - Doing Business ranking: jumped from 137th place in 2004 to 18th in 2008. - GDP growth: - Growth of GDP averaged 8.3 percent during 2004–06. - 12.4 percent in 2007. - 9.3 percent in the first quarter of this year. - Private capital inflows: - 2004: $0.5 billion. - 2007: $2.3 billion, which is 22½ percent of GDP. - Over 300 international institutional investors active. - April 2008: issued first sovereign Eurobond, raising $500 million (heavily oversubscribed). - Inflation: - Mid-2006: 12-month inflation exceeded 14 percent. - End-July this year: 12-month inflation reduced to 9.8 percent. - Current account and exports: - 2007 current account deficit: $2.0 billion or about 20 percent of GDP. - First half of 2008 estimated current account deficit: about $1.5 billion. - About 60 percent of capital inflows used for import financing. - Export growth: average annual growth of 26 percent (2003–07). - Trade initiatives: free-trade agreement with Turkey (awaiting ratification by Turkey), requested free-trade agreement with the U.S., benefiting from GSP+ with the EU. ### Fiscal performance (historic and institutional) - Tax revenue: - 2003: tax revenues (including social contributions) 14.6 percent of GDP. - 2007: tax revenues 25.8 percent of GDP. - Improvements due to improved tax administration, simplified tax code and procedures, better taxpayer services and infrastructure, and fewer taxes and lower rates. - Parliamentary budget rules (July 2008 legislation): - State budget expenditures should not exceed 29 percent of GDP in 2009 (compared with budget estimate of 30.3 percent for this year). - Decline to 25 percent of GDP by 2011, and remain at or below this level thereafter. - Further liberalization of the tax regime approved. - Establishment of two sovereign wealth funds—the Stabilization Fund and the Future Generations Fund—to shelter surplus revenues. - First half of 2008 performance: - Revenue collection exceeded projections by 2.6 percent and increased by 31.3 percent compared with the same period last year. - Privatization proceeds in first six months of 2008: $352 million, exceeding forecast by 68 percent. - Major part of Eurobond proceeds transferred to the Future Generations and the Stabilization Funds; effect on consolidated budget deficit neutral. - Budget management improvements underway: - Treasury Single Account (TSA) established; most revenues and expenditures flowing through a single process. - Consolidation of foreign currency deposits into a single account at the NBG planned during 2009. - Progress towards implementation of a modern E-Treasury system. ### Monetary policy (institutional reform and operations) - March 2008 amendments to the law governing the National Bank of Georgia (NBG): - Price stability made the primary objective of the NBG. - Financial stability and support for sustainable economic growth are secondary objectives. - NBG required to target single-digit inflation; if not met (with a 2-percentage-point margin of error), certain sanctions including possible dismissal of the president of the NBG are imposed. - Banking supervision separated from the NBG; a unified Financial Supervision Agency (FSA) created. - NBG board downsized from nine to five members. - Monetary Policy Committee created as key decision-making body on monetary policy issues. - Monetary tightening November 2007–July 2008: - NBG’s main policy rate introduced and raised by 500 bps from November 2007 through July 2008. - NBG used certificates of deposits (CDs) and government notes for open market operations. - Development of interbank lending market and daily publication of Tbilisi Interbank Rates (TIBR) for overnight and up to seven-day loans. - Monetary aggregates and credit: - Reserve money growth limited to 21 percent in the 12 months to mid-August 2008. - Broad money growth 28 percent as of end-July 2008 (compared with end-March 2008 figures of 22 percent and 51 percent, respectively). - Growth of bank credit: 55 percent in the 12 months to end-July 2008; slowed to 23 percent in the first seven months of this year. - Exchange rate policy: - Since late 2007, greater flexibility in exchange rates allowed. - First seven months of 2007: nominal lari appreciation against the U.S. dollar of 3 percent. - First seven months of 2008: nominal lari appreciation nearly 13 percent. - Reduced frequency of NBG interventions contributed to inflation reduction. - Future monetary strategy: - Plan to adopt an inflation-targeting regime during 2009 (acknowledging constraints to full immediate implementation). - Immediate guidance by quarterly targets (performance criteria) for net international reserves and net domestic assets of the NBG, as set out in the TMU. ### Structural reforms and financial sector oversight - Creation of the Financial Supervision Agency (FSA): - Fully independent agency with its own supervisory board. - Implementing a system of consolidated supervision of banks, insurance companies and securities firms. - AML/CFT and ownership standards: - Strengthened and refined AML/CFT legislation approved by parliament in March this year. - July MONEYVAL biannual review fully endorsed Georgia’s AML/CFT legislation framework. - Banking laws modified to require assessment of actual beneficial owners, not just nominal owners. - National Bank restructuring: - Since October 2007, total staff at the NBG decreased by 350 or about 56 percent. - Aim: increase professionalism and efficiency to achieve policy objectives and boost public confidence. - Additional structural reforms implemented: - Deregulation of the natural gas market. - Streamlined securities regulation and demutualized the stock exchange. - Removed operational constraints in and facilitated entry into financial markets. - Liberalized issuance of building permits; simplified export and import procedures. - Passage of a new law on insolvency and new foreclosure procedures. - Further simplified business registration procedures. - Comprehensive healthcare sector reform: full privatization of health care provision facilities and provision of health care insurance for low-income groups. ### Economic outlook and scenarios post-conflict - Near-term deterioration due to conflict; baseline projections and scenarios: - Prior to the conflict: - Projected continued high real GDP growth (about 9 percent) in 2008. - Projected lower inflation of 8 percent by the end of the year. - Post-conflict near-term projection: - Expected sharp slowdown in private inflows (from $1.5 billion in the first half of the year to $0.5 billion in the second half) would lead to lower real economic growth (now projected at only 3½ percent). - 2009 projection: - Private inflows anticipated to pick up modestly to $1.7 billion, which could support real GDP growth of 4 percent. - Inflation would remain in single digits. - Narrowing of the external current account deficit not expected to be commensurate with slowing of economic growth, reflecting higher imports for reconstruction and high import prices. - Medium-term projection: - Inflows expected to recover and sustain higher investment; export growth expected to increase gradually. - Real GDP growth projected to recover to mid single digits, while inflation would decline gradually. - External financing and reserves needs: - Without increased international support, international reserves would decline sharply over the remainder of this year and next, to a level covering just a few weeks of imports. - Strong international support is essential to maintain adequate reserves, covering 2¾ months of imports by end-2009. - Financing gap of about $1.2 billion over the 2008–09 period expected to be covered by the IMF SBA and by grants and concessional financing provided by other IFIs and bilateral donors and creditors. ### Fiscal policy commitments and performance criteria going forward - Fiscal posture: - Committed to minimizing the size of the fiscal footprint, ensuring fiscal prudence, and preventing the underlying fiscal stance from contributing to inflationary pressures. - Committed to rebuilding infrastructure damaged by the conflict; expect much reconstruction spending to be financed by donor grants. - Some temporary increase in the fiscal deficit inevitable during 2008 and 2009; determined to return to medium-term strategy of containing fiscal footprint as soon as feasible. - 2008 fiscal target and adjustments: - Will endeavor to delay all nonessential expenditures. - Ensure overall fiscal deficit as defined in the TMU is less than 6 percent of GDP (subject to quarterly performance criteria for end-September and end-December). - This overall deficit includes initial reconstruction spending in 2008. - Subject to an upward adjustor of at most 2 percent of GDP if concessional donor financing exceeds currently declared commitments. - 2009 fiscal and legislative commitments: - 2009 state budget target: fiscal deficit of no more than 3¾ percent of projected GDP, with an upward adjustor of no more than 3 percent of GDP if concessional donor financing exceeds currently declared commitments (structural benchmark for end-December 2008). - Will not introduce any new taxes, duties or fees, or increase any tax rates in 2009 (in addition to implementing legally required tax rate reductions). - Submit legislation to upgrade the Budget System Law (BSL) to an organic law (structural performance criterion for end-June 2009). - Ensure direct purchases of civilian goods and services will not be more than 15 percent of overall approved expenditures for each state agency. - Limit contracting of public and publicly-guaranteed non-concessional external debt to no more than $250 million during the remainder of 2008 and $250 million during the first half of 2009 (subject to quarterly performance criteria). - During 2009, will not increase public and publicly guaranteed domestic debt by more than GEL 100 million. - Medium-term fiscal management improvements: - Develop Basic Data and Directions (BDD) document to set out medium-term fiscal and public expenditure strategies and plans, including realistic resource ceilings and wider dissemination. - Extend medium-term action plans to include all spending agencies, with clear strategic directions (goals) and performance indicators (performance indicators will be developed for at least three ministries in 2010), and detailed costing. - Continue to improve the budget process and format consistent with PEFA findings. - Revenue administration reforms: - Revenue Service (RS) formed in 2007; developing risk based customs control and tax audit systems. - In 2009, RS to finish implementation of the risk management system and initiate risk assessment based tax audits. - Amendments to the Customs Code to introduce post-clearance system to be submitted to parliament by June 2009 in conjunction with modernization of the Tax Code. - RS to prioritize taxpayer services; MoF to ensure e-filing captures all types of taxes by 2009. - Plan to receive, in 2008 Q4, technical assistance and consultancy services to prepare for transition by 2012 to self-assessment regime for personal income tax. - MoF structural reforms in 2009 to establish an independent dispute resolution office within the MoF and a hearing system. - Transparency and reporting: - From 2009, Ministry of Finance will produce annual reports on (i) consolidated (including government, LEPLs, and state-owned enterprises) public expenditures and (ii) public arrears and debt. - Ensure information on revenues/expenditures of public services providing LEPLs is transparent and provided in the state budget. *Source: IMF staff report content unit _cr08328 as provided.* ### 33. We are concerned about the impact on bank liquidity of the loss of confidence ### _cr08328 - 33. We are concerned about the impact on bank liquidity of the loss of confidence ### Liquidity management and lender-of-last-resort (LOLR) - Immediate crisis actions taken: - The NBG waived the reserve requirements on a temporary basis. - The NBG activated an uncollateralized lending facility. - Objectives going forward: - "We intend to enhance our instruments for liquidity management." - Structural benchmark and actions: - Develop and publish a liquidity management framework that outlines the objectives of liquidity management, describes the instruments, and assigns the instruments to these objectives (structural benchmark for end-March 2009). - The framework will inter alia: - (i) provide a clearer planning horizon for banks by enforcing the reserve requirement while adjusting the rate to the liquidity needs of the system. - (ii) introduce a refinancing mechanism as the main liquidity providing instrument at interest rates determined by the market. - Revision of LOLR: - Revise the NBG lender of last resort (LOLR) facility to ensure availability of LOLR would not encourage excessive risk-taking. - NBG policy: provide LOLR only to those institutions that are judged by the FSA to be solvent. - Will be more specific about the limits and size of the LOLR facility. - The revised LOLR framework will be finalized by end-December 2008 (structural performance criterion). ### Exchange rate policy and international reserves - Policy stance: - "We are fully committed to a flexible exchange rate policy." - During the crisis-management period, the NBG defended the lari to prevent further uneasiness in the market. - Under the SBA: - A first drawing would serve to replenish reserves. - Priority will be given to maintaining the targeted level of international reserves. - The exchange rate will be allowed to adjust to a shortfall in foreign inflows in the remainder of 2008 and 2009. ### Central bank modernization plans - Planned initiatives: - Strengthen human resource management practices. - Introduce a new payments system for commercial banks and the treasury. - Automate banknote processing system. - Build a new cash center. - Introduce new investment management and accounting software. - Strengthen cooperation with partner central banks. - Start participation in the World Bank RAMP project. ### Structural reforms (overview and targets) - Reform orientation: - Aim to remain among the world’s top economic reformers by pursuing vigorous free-market structural reform consistent with the Anglo-Saxon economic model. - Privatization program (targets and intentions): - By the end of 2009: - Privatize at least two-thirds of the shares of the Georgian State Electricity Company. - Privatize at least 24 percent of Poti Sea Port. - Privatize Georgian Post. - Privatize about 100,000 hectares of agricultural land. - Privatize several regional airports and numerous other state-owned assets. - Labor and migration policy: - Avoid introducing any laws or regulations that may reduce labor market flexibility, including the labor code. - Further liberalize migration and employment policy to address structural labor market shortages and enhance appeal for tourism and retirement. - Financial sector and supervision: - FSA has started on-site inspections to assess vulnerabilities after the conflict, evaluating banks’ liquidity positions and loan portfolios and the situation of main borrowers. - FSA to ensure banks have contingency plans to mitigate potential liquidity and capital pressures. - Strengthen cooperation between FSA and NBG: the two institutions will sign and implement a memorandum of understanding (structural benchmark for end-October 2008). The memorandum will define cooperation and accountability areas, including information exchange on individual institutions’ data and specific requirements to share irregularities promptly. - Strengthen independence: appoint the remaining members to the FSA board by end-June 2009 (structural benchmark for end-June 2009) and restructure the NBG board by end-2009. - Submit to parliament during the fourth quarter of 2008 a Financial Code to unify and consolidate banking, insurance, and securities regulation while avoiding additional regulatory burden beyond recent legislation. - Build capacity at the FSA to adopt modern practices of risk-based supervision on a consolidated basis. - Welcome a streamlined and focused Financial Sector Assessment Program (FSAP) update mission in the second half of 2009. - Other regulatory and sectoral reforms: - Avoid amendments to or new legislation in anti-trust policy and consumer protection in the aftermath of the conflict. - Introduce a modern regulatory framework for water utilities. - Further energy sector deregulation. - Modernize regulations for the use of forests and mineral resources. - Implement a merit based civil service reform. - Continue healthcare reform: completion of hospital and financing reform, licensing medical professionals and education, and reduce regulatory barriers to entry of pharmaceuticals. - Statistics reform: - Introduce a new draft Law on Statistics to parliament by year-end 2008 to create a modern and independent statistical service. - Establish a supervisory board including independent board members and set up an advisory panel to oversee methodology and effectiveness improvements. ### Program monitoring, performance criteria, and selected TMU points - Monitoring and reviews: - The program will be subject to quarterly reviews, and quarterly performance criteria as set out in the TMU. - Completion of the first two reviews under the SBA, scheduled for November 2008 and February 2009, will require observance of the quantitative performance criteria for end-September and end-December 2008 in Table 1 and the structural performance criteria for end-December 2008 shown in Table 2. - "We authorize the IMF to publish the Letter of Intent and its attachments, and the related staff report." - Selected items from Table 2: Structural Benchmarks and Performance Criteria (Action — Timing) - FSA and NBG to sign and implement a memorandum of understanding to strengthen cooperation — End-October 2008. - NBG to introduce revised LOLR facility (structural performance criterion) — End-December 2008. - Submission to parliament of a state budget for 2009 with an overall fiscal deficit of no more than 3¾ percent of projected GDP (subject to an adjustor of at most 3 percent of GDP as set out in the TMU) — End-December 2008. - NBG to develop and publish a liquidity management framework, including the introduction of a refinancing mechanism as the main instrument to provide liquidity — End-March 2009. - Appointment of the remaining members to the FSA board — End-June 2009. - Submission to parliament of a law to upgrade the Budget System Law to an organic law (structural performance criterion) — End-June 2009. - TMU: exchange rate and reserves, fiscal adjustor details: - The exchange rate for the purposes of the program of the Georgian lari to the U.S. dollar is set at GEL 1.41 = $1. - The stock of NIR amounted to $1,060 million as of end-June 2008 (at the program exchange rate). - Adjustor to fiscal deficit target: up to 388 million Georgian lari (equivalent to 2 percent of projected GDP) for 2008 and 652 million lari (equivalent to 3 percent of projected GDP) for 2009, in the event that concessional donor financing exceeds current declared commitments. *Source: _cr08328 - 33. We are concerned about the impact on bank liquidity of the loss of confidence* ### 13. Supporting material: Details of all new commitments and government guarantees ### 10. Georgia’s debt outlook shows resiliency to a number of exogenous shocks as ### 10. Georgia’s debt outlook shows resiliency to a number of exogenous shocks as ### Overall assessment - External public debt solvency and liquidity ratios would remain well below the thresholds applicable to Georgia under most scenarios. - The NPV of debt-to-GDP ratio is most vulnerable to a one-time 30 percent nominal depreciation relative to the assumed baseline. - The NPV of debt-to-exports ratio would deviate most from its baseline path when the rate of export growth is one standard deviation below the historic average. - Holding the primary balance unchanged from 2008 onwards (stress test) implies a major deterioration in debt ratios, with the NPV of debt-to-revenue ratio approaching 250 percent — a result the text flags as misleading because the 2008 primary balance deficit reflects a large one-off spending in the wake of the recent conflict. ### Stress tests and alternative scenarios (design and notable outcomes) - Staff conducted a stress test that assumes new borrowing of $500 million over 2008–2009 (program limit) at commercial terms. - Result: deterioration in debt ratios in the near term, with the NPV of public external debt-to-GDP ratio reaching 25 percent in 2009––5 percentage points above the baseline scenario. - Debt service ratios would also be substantially above those under the baseline assumptions. - Identified extreme shocks by indicator (text notes which shock produces the most extreme ratio in 2018): - For figure b (PV of debt-to-GDP ratio): Non-debt flows shock. - For figure c (PV of debt-to-exports ratio): Exports shock. - For figure d (PV of debt-to-revenue ratio): Non-debt flows shock. - For figure e (Debt service-to-exports ratio): Exports shock. - For figure f (Debt service-to-revenue ratio): Non-debt flows shock. - Bound tests include: - B1. Real GDP growth at historical average minus one standard deviation. - B2. Export value growth at historical average minus one standard deviation. - B3. US dollar GDP deflator at historical average minus one standard deviation. - B4. Net non-debt creating flows at historical average minus one standard deviation. - B5. Combination of B1–B4 using one-half standard deviation shocks. - B6. One-time 30 percent nominal depreciation relative to the baseline in 2009. ### Key statistics and model outputs (selected exact values as reported) - One-time shock sensitivities: - One-time 30 percent nominal depreciation relative to the baseline in 2009 is highlighted as producing large NPV impacts. - Stress-test illustrative outcomes: - NPV of public external debt-to-GDP ratio: reaches 25 percent in 2009 under $500 million new commercial borrowing (5 percentage points above baseline). - NPV of debt-to-revenue ratio: approaching 250 percent under the stress that fixes the primary balance at the 2008 level (noted as potentially misleading due to one-off 2008 spending). - Public sector debt levels and dynamics (selected rows, all in percent of GDP unless otherwise indicated): - Public sector debt (estimate): 34.2 (2005), 27.9 (2006), 22.4 (2007), 24.5 (2008). - o/w foreign-currency denominated: 27.1 (2005), 21.9 (2006), 17.5 (2007), 21.0 (2008). - Change in public sector debt: -10.6 (2005), -6.3 (2006), -5.6 (2007), 2.1 (2008). - Identified debt-creating flows: -9.3 (2005), 1.2 (2006), 3.2 (2007), 4.4 (2008). - Primary deficit: -5.5 (2005), 1.0 (2006), 3.8 (2007), -2.6 (2008). - Revenue and grants: 30.1 (2005), 26.7 (2006), 29.2 (2007), 27.7 (2008). - Primary (noninterest) expenditure: 24.6 (2005), 27.7 (2006), 33.1 (2007), 32.6 (2008). - Other sustainability indicators (selected): - PV of public sector debt: 7.2 (2005), 6.0 (2006), 18.0 (2007), 20.8 (2008), 23.1 (2009), 20.9 (2010). - PV of public sector debt-to-revenue and grants ratio: 23.8 (2005), 22.6 (2006), 61.7 (2007), 75.0 (2008), 88.8 (2009). - Debt service-to-revenue and grants ratio: 14.2 (2005), 13.8 (2006), 6.0 (2007), 6.6 (2008), 7.4 (2009). - Gross financing need: -3.5 (2005), -1.2 (2006), 4.7 (2007), 5.8 (2008), 7.0 (2009). - Macroeconomic assumptions (selected exact values): - Real GDP growth (in percent): 9.6, 9.4, 12.4, 6.6, 3.7, 3.5, 4.0, 6.0, 6.0, 7.0, 6.0, 5.4, 4.5, 4.5, 4.5 (series as shown in the table). - GDP deflator in US dollar terms (change in percent): 14.1, 10.7, 17.2, 10.0, 8.1, 25.5, 1.2, 6.5, 6.0, 6.0, 6.0, 8.5, 1.9, 1.0, 1.7 (series as shown). - Effective interest rate (percent): 2.5, 4.0, 5.7, 3.1, 1.0, 8.0, 6.5, 5.8, 6.0, 6.0, 6.6, 6.5, 6.1, 7.3, 6.7 (series as shown). - Growth of exports of G&S (US dollar terms, in percent): 32.8, 17.6, 26.1, 18.0, 14.3, 13.1, 11.5, 17.5, 11.5, 10.5, 8.8, 12.2, 7.1, 7.4, 7.3 (series as shown). - Growth of imports of G&S (US dollar terms, in percent): 33.1, 33.0, 34.0, 17.0, 17.3, 20.0, 4.1, 7.9, 8.0, 6.3, 7.3, 8.9, 6.5, 6.8, 6.4 (series as shown). - Memorandum items (selected): - Nominal GDP (Billions of US dollars): 6.4, 7.8, 10.2, 13.3, 14.0, 15.8, 17.7, 20.1, 22.6, 32.8, 56.7 (series as shown). - PV of PPG external debt (in Billions of US dollars) (selected end projection): 3.4 (2018) as shown. ### Policy implications and interpretation guidance (as stated in the text) - Stress-test outcomes should be interpreted with caution when driven by exceptional one-off factors (for example, the 2008 primary balance deficit reflects a large one-off spending related to the recent conflict). - The results indicate that, while debt ratios are resilient under many shocks, specific scenarios—especially large nominal depreciation and prolonged weak export growth—can materially worsen solvency and liquidity indicators. - The simulated $500 million nonconcessional borrowing at commercial terms over 2008–2009 (program limit) would meaningfully raise near-term external debt and debt-service burdens, underscoring the importance of financing terms and composition for debt sustainability. *Source: Staff projections and simulations.* ### 1. The amount of Fund resources requested by Georgia under the proposed SBA ### The amount of Fund resources requested by Georgia under the proposed SBA ### Exceptional access summary - Total proposed access under the SBA: SDR 477.1 million (317 percent of quota). - Amount available upon Board approval: SDR 161.7 million. - First-year availability (footnote): SDR 382.5 million (254 percent of quota) would be made available during the first year of the arrangement. - Arrangement duration proposed: 18-month SBA. ### Criterion 1 — Balance of payments need and capital account pressures - Post-conflict investor confidence weakened, reflected in: - Large loss of international reserves. - Fall in bank deposits. - Increased Eurobond spreads. - Staff estimates and financing gaps: - Private sector capital inflows could fall to some $300 million in the second half of 2008, $1.2 billion below the record level attained in the first six months. - Gross reserves in the absence of a Fund program would fall to $920 million (1½ months of imports). - Total external financing requirement: $3.2 billion in 2008 and $2.3 billion in 2009. - Cumulative balance of payments gap over 2008–10: $1.4 billion ($1.2 billion in 2008–09). - Additional drivers of the large financing need: - Reconstruction needs raising the current account deficit versus pre-conflict expectations. - Need to replenish the weak international reserve position of the NBG in 2008 and 2009. ### Criterion 2 — Debt sustainability analysis (DSA) findings - Public/external debt path: - External public debt would reach 26 percent of GDP by end-2009 compared to 17½ percent at end-2007. - Under a baseline scenario, external public debt-to-GDP ratio would decline to 15 percent by 2013. - Drivers of debt increases in 2008–09: - $500 million Eurobond issued earlier in 2008. - Purchases under the proposed SBA. - Post-conflict reconstruction-related borrowing on concessional terms. - Risks and vulnerabilities: - Key medium-term risks: large repayments of the 2008 Eurobond and repurchase obligations under the proposed SBA in 2012–13. - Potential vulnerability from rapidly increasing private external debt, mainly by Georgian banks. - Staff judgement: Georgia’s debt is low and there is a high probability it will remain sustainable under the program. ### Criterion 3 — Prospects for regaining market access - Pre-conflict market access: Georgia floated a $500 million Eurobond earlier in 2008. - Post-conflict market indicators: - Sovereign bond spread over comparable U.S. treasuries remaining at 240 points above the pre-conflict level. - Sovereign and banks’ external debt ratings lowered by one notch. - Staff view on market reaccess: - Georgia should be able to progressively regain market access through 2009 provided that: - Regional tensions subside and investor confidence is restored. - Government policies under the program preserve macroeconomic and financial stability. - The program allows for non-concessional debt of up to $500 million in the event authorities find an appropriate opportunity to tap the markets during the program period. ### Criterion 4 — Policy program and implementation capacity - Policy track record: - Strong record of policy implementation under the PRGF arrangement (expired September prior to this document), providing confidence in capacity to deliver. - Program focus: - Maintain prudent macroeconomic policy. - Implement structural reforms to restore investor confidence, strengthen financial sector resilience, and spur growth. - Risks to implementation: - Continued tensions over the two breakaway regions. - Domestic political context could imperil capacity to deliver adjustment. ### Overall assessment and staff recommendation - Staff supports the authorities’ request for an 18-month SBA. - Rationale: - Proposed access would be at the low- to mid-end of other exceptional access cases. - Financial support can assist in the buildup of reserves and lay the basis for a lasting exit from Fund financial assistance. - Authorities’ drawing decisions: - Decisions on whether to draw future purchases beyond the first one will depend on market conditions. ### Key figures from "Georgia: Proposed Access, 2008-2010" (as presented) - Proposed Access (in millions of SDRs): 477, 1, 2,894, 14,635, 9,157 - Average annual access (percent of quota): 212, 55, 119, 358, 249, 100, 20, 50, 39 - Total access in percent of: - Actual quota: 317, 27, 272, 790, 611, 100, 30, 75, 62 - Gross domestic product: 5.6, 55, 2.8, 8.3, 6.5, 98, 0.7, 2.7, 1.8 - Gross international reserves: 82, 69, 27, 121, 97, 92, 5, 41, 41 - Exports of goods and nonfactor services: 20, 41, 11.1, 46.4, 35.2, 96, 1.9, 7.0, 5.5 - Imports of goods and nonfactor services: 11, 16, 14.4, 64.8, 36.9, 92, 1.6, 6.4, 4.8 - Total debt stock — Public: 33, 92, 6, 16, 15 - Total debt stock — External: 24, 96, 5, 15, 11, 99, 2, 6, 4 - Total debt stock — Short term: 302, 100, 19, 51, 45 - M2: 42, 89, 5, 24, 29, 95, 1, 12, 102 *Source: IMF staff assessment in the Informational Annex to the Request for Stand-By Arrangement for Georgia (September 10, 2008).* ### 2. The Poverty Reduction Support Operation series of the last three years have been the ### 2. The Poverty Reduction Support Operation series of the last three years have been the ### Role and focus of the PRSO program - The PRSO series has been the cornerstone of the Georgia CPS Strategy and supported elaboration and implementation of the government’s poverty reduction strategy as described in the PRSP (EDPRP) Progress Report. - The PRSO program focuses on four central reform areas: - (i) strengthening public sector accountability, efficiency, and transparency; - (ii) improving electricity and gas sector services; - (iii) improving the environment for private sector development; - (iv) improving social protection, education and health care services. - Timeline of key PRSO and related IMF/World Bank actions: - Joint Staff Advisory Note and second PRSP Progress Report presented to IDA and IMF Boards in September 2006. - IMF presented staff report of sixth and final review under the PRGF arrangement to the IMF Board in August 2007. - Third PRSO (PRSO III) discussed and approved by the Board in June 2007. - PRSO IV (the last in the series of PRSOs) approved on May 27, 2008. - World Bank/IDA financial support for PRSOs: - First PRSO approved in September 2005: US$13.5 million regular IDA credit and US$6.5 million IDA grant. - Second PRSO approved October 2006: US$20 million IDA credit. - Third PRSO approved June 2007: US$20 million IDA. - Fourth PRSO approved May 2008 (amounts specified above for earlier PRSOs). ### IMF and World Bank roles and comparative lead responsibilities - IMF lead responsibilities and engagement: - Took the lead in assisting Georgia in improving macroeconomic stability and pursuing fiscal reforms. - IMF took the lead in monetary policy and domestic customs revenue. - IMF presented the staff report of the sixth and final review under the PRGF arrangement to the IMF Board in August 2007. - IMF has focused on reducing quasi-fiscal losses in the energy sector at the beginning of the last PRGF program. - IMF leads in fiscal framework and reforms in tax policy and tax and customs administration; Fiscal Affairs Department leads tax policy and tax and customs administration reform. - IMF leads the monetary framework and collaborates with the NBG to design and implement a monetary program aiming at rebuilding international reserves while keeping inflation low and monetizing the economy. - IMF technical assistance contributed to improvements in national accounts, price, monetary and government financial statistics. - World Bank/IDA lead responsibilities and engagement: - Took the lead in policy dialogue on structural issues: (i) strengthening public expenditure management; (ii) improving performance of the public sector; (iii) reducing corruption; (iv) deepening and diversifying sources of growth; (v) protecting the environment; and (vi) reducing poverty. - World Bank leads in social sectors, rural development, environment, infrastructure, private sector development, and energy. - World Bank leads the dialogue on structural reforms through the PRSO program and has supported institution building via the Structural Reform Support Project. - Areas of joint/shared responsibility: - Poverty reduction strategy implementation (PRSP/EDPRP), including a JSAN issued in September 2006. - Budget planning and execution: PRSO supports MTEF development and public financial accountability; IMF focused on treasury reform within MoF. - Financial sector reforms: joint Financial Sector Assessment Program supported strengthened supervision, introduction of international accounting standards, consolidation of banks, anti-money laundering legislation, regulatory improvements, and payment system strengthening. ### World Bank-led areas with no direct IMF involvement - Social sectors: - IDA updates Georgia’s Poverty Assessment based on quarterly household survey data. - Focus on improving execution of budgetary expenditures for health, education and poverty benefits; raising efficiency in use of scarce public resources. - Social Investment Fund credits target areas with high poverty to provide basic infrastructure to poorest communities. - Under PRSO, a poverty benefit targeted for the extreme poor is being implemented. - Education: - Adaptable Program Credit of Education System Realignment & Strengthening Program (APL #1 and APL #2) addresses curriculum reform, national assessment/examination system, teacher training, learning materials, and financing via a per-capita based formula for basic education. - Second phase supports institutional and policy framework implementation and includes support to schools in emergency conditions. - Health: - IDA credits support primary health care via training, equipment, health information system support, and capacity building in management. - IDA supports health insurance coverage for the poor and has conducted initial impact evaluation. - Policy dialogue via PRSO and Health Technical Assistance on regulatory framework for health insurance market, provider payment issues and benefit package. - Infrastructure: - Projects include Secondary and Local Roads Project, First East-West Highway Improvement Project, Second East-West Highway Improvement Project, Municipal Development and Decentralization Project II, and Social Investment Fund Project. - Infrastructure Pre-Investment Facility provides technical assistance for feasibility and effectiveness assessment, focusing on energy and transport; targets preparation of First and Second East-West Highway Improvement projects and preparation of Khudoni Hydro Power Plant project (if feasible). - Rural development: - IDA credits supported private sector farming, agro-processing, agricultural credit, irrigation and drainage, agricultural research, and creation of local institutions such as rural credit unions and water users associations. - A recently approved Rural Development Project aims to develop productivity and profitability of private agriculture to increase incomes and employment and reduce poverty in rural areas. - Judicial reform: - Recently closed Judicial Reform project funded court administration and case management procedures, courthouse rehabilitation/construction, computerized network, judicial training, and public information/outreach. ### World Bank-led areas that feed into IMF analysis and collaboration - Private sector development: - PRSO program and IFC advisory work focus on improving investment climate and reducing constraints. - IDA supported private participation in energy, urban services and agriculture. - IMF worked with authorities to initiate audits of accounts of three major state-owned enterprises. - Energy: - Energy sector progress under PRSO: payment collections and service levels improved substantially in power sector. - World Bank focused on improved bill collections, handling of sector legacy debt, some sector restructuring, and pursuit of tariff policies at cost-recovery levels; facilitated by World Bank-assisted review of tariff policy methodology. - Georgian authorities prepared and implemented Energy Sector Strategic Action Plans under PRSO since 2005. - World Bank finances feasibility study for a major new hydropower plant that could add about 20 percent to the country’s hydropower capacity. - Public sector management: - PRSO first pillar supports improvement of public expenditure policies and management; procurement reform; strengthening public financial management accountability; intergovernmental fiscal reform; strategy for administrative and civil service reform; National Anti-corruption Strategy. - Public Sector Financial Management Reform Support Project provides technical assistance and capacity building supporting PRSO first pillar. - IMF provides technical assistance in tax and customs administration reform. - Municipal finance: - Municipal Development and Decentralization Project II assists government to review intergovernmental fiscal relations and suggest an equalization transfer system. - Health sector: - Structural Reform Support Project supported reduction of surplus hospitals and personnel, technical assistance in health care financing, HR development, service provision, quality of services; medical facilities renovated, equipped and staff trained. ### IMF-led areas with World Bank inputs - Fiscal framework and tax/customs administration: - IMF’s prudent fiscal policy framework informed IDA’s public expenditure management work. - IMF Fiscal Affairs Department leads tax policy and tax and customs administration reform. - Economic statistics: - IMF technical assistance improved national accounts, price, monetary and government financial statistics. - World Bank grant on Statistical Capacity Building will build on IMF technical assistance recommendations. ### IFC engagement and private sector financing (as presented) - IFC membership and activity: - Georgia became a shareholder and member of IFC in 1995. - IFC’s portfolio in Georgia as of January 2008 stands at about $93 million with seven clients. - Financial sector support: - IFC supported development of housing finance market, providing investment and technical assistance to TBC Bank, Bank of Georgia, and Bank Republic. - Helped establish ProCredit Bank of Georgia to reach micro and small enterprises. - Provided a credit line to TBC Leasing to support SME client portfolio growth. - In FY08, IFC supported GRDC in financing development of office and retail space. - Real sector investments: - Recent transaction: loan to TAV to support construction of new airport terminals in Tbilisi and Batumi. - Investments in oil transit include equity and credit to local and international companies, investments by British Petroleum and other sponsors in Baku-Supsa Early Oil Pipeline and Baku-Tbilisi-Ceyhan Pipeline. - Other investments: electricity distribution (AES-Telasi), mineral water (GGMW), glass bottle production (Ksani Glass Factory). - Sectors of interest: agribusiness, infrastructure, manufacturing, development of natural resources. - Technical assistance: - Donor-supported technical assistance to strengthen client banks and introduce new financial products (including leasing and housing finance). - Currently providing technical assistance to improve the business climate and corporate governance practices. - World Bank-IFC Doing Business report ranked Georgia as a top reformer in Doing Business 2008. ### World Bank Group Strategy and recent operations (FY06–09 CPS and related projects) - CPS timeline and assessment: - World Bank Executive Board endorsed CPS for FY06–09 on September 15, 2005. - CPS Progress Report assessing mid-term progress presented to the Board in June 2008. - First two and a half years characterized by rapid reform with most CPS goals achieved on schedule or earlier than anticipated. - Recent and listed World Bank operations and amounts: - US$19 million First East-West Highway Improvement Project approved November 2006. - US$35 million Second East-West Highway Improvement Project approved November 2007. - US$15 million Education System Realignment & Strengthening Program supported by Japanese government cofinancing grant US$4.9 million. - US$5 million Infrastructure Pre-Investment Facility. - US$3 million grant Public Sector Financial Management Reform Support Project. - US$24 million Reform Support Credit. - US$20 million Secondary and Local Roads Project. - US$3.6 million Electricity Market Support Project. - US$10 million Rural Development Project. - US$20 million PHC Development Project. - US$10 million Avian Influenza Control and Human Pandemic Preparedness and Response Project. - US$5 million Irrigation and Drainage Community Development Project Additional Funding for flood control. - World Bank continuing dialogue with government on a more comprehensive medium-term reform strategy potentially supported by future programmatic Development Policy Credit series and technical assistance operations. ### Other support, diagnostics, and planned analytical work - Past analytical work and assessments: - Public Expenditure Review (PER) prepared in 2002. - Trade Study in 2003. - Country Procurement Assessment Report (CPAR) in 2002. - Country Financial Accountability Assessment (CFAA) in 2003. - Country Fiduciary Assessment (CFA) prepared in 2007. - Series of annual programmatic Poverty Assessments being implemented with a report to be issued in 2008. - Planned work: - Programmatic Public Finance Policy Review (PPFPR) and a Country Economic Memorandum (CEM) planned for FY09. - Broad project support and analytical/advisory activities across: education, health care, social protection, energy, roads, water and sanitation, agriculture, agricultural research and extension, irrigation and drainage, forestry, environment, biodiversity, enterprise development, municipal development, judicial reform, and cultural heritage. ### Contacts and EBRD note - Questions may be referred to: - Ms. Afsaneh Sedghi (202-473-7518) - Mr. A. Cholst (202-458-0324) - Ms. R. Quintanilla (202-473-7673) - EBRD activity as of June 30, 2008: - EBRD had signed 83 investments in Georgia with cumulative commitments totaling €519 million. - Current portfolio stock equals to €369 million. - Investments in the private sector since 2004 increased by 153 percent from €160 million to €441 million at the end of June 2008. *IMF / World Bank summary as contained in the provided content unit.* ### 1. The Bank is currently focusing its efforts on developing infrastructure, reforming the ### _cr08328 - 1. The Bank is currently focusing its efforts on developing infrastructure, reforming the ### EBRD strategic focus and portfolio composition - The Bank is focusing efforts on: developing infrastructure, reforming the financial sector, supporting energy sector, introducing further market competition, restructuring the corporate sector, and introducing sound corporate governance. - Current portfolio composition: - 38 percent investments into financial institutions sector - 8 percent into infrastructure - 34 percent into corporate sector - 20 percent into energy sector - The ratio of private sector projects in the portfolio now stands at 91 percent. - The Bank plans to focus primarily on private sector financing, but may consider selected public sector projects. The Bank will give preference to nonsovereign operations although, where sovereign guarantees will be required, donor cofunding on a grant basis will be sought. ### 2007 activity and first half of 2008 commitments - 2007: - The Bank signed 22 transactions in Georgia for €192 million. This is the highest annual business level to date for the Bank in Georgia. - First half of 2008: - EBRD has already committed €61 million into 9 projects. - Number of projects = 9 - Total EBRD finance for first half of 2008 = 61.0 - Selected project examples and EBRD finance amounts: - €30 million loan framework facility and €10.2 million equity investment in Georgian Reconstruction and Development Company (GRDC). - Meinl Caucasus and Central Asia Fund established with Meinl European Land (aimed at raising the quality of retail outlets in the major cities in the region). - Energy Efficiency Facility introduced in Cartu Bank (€8.5 million) and TBC Bank (€7 million). - Medium-Sized Loan Cofinancing Facility introduced to Bank Republic with a €12.6 million credit line. - €9.5 million mortgage line to TBC Bank. - Extended loans in sum of €15.8 million to three Georgian banks in support of micro and small enterprise development. - €9.45 million syndicated loan to ProCreditBank in support of agricultural lending. - €12 million syndicated loan to TBC Bank in support for expansion of its SME lending. - €3 million loan to the city of Kobuleti to rehabilitate and extend the water and wastewater networks, to install water meters, to construct a wastewater treatment plant. ### Net cumulative business volume (as of January 2008) — selected entries and totals - The source lists many individual operations with Sector, Team, Total Project Value, and EBRD Finance (Debt/Equity). Selected entries (as presented): - AES Telasi — Power and Energy — 138.020.4 — 20.40.0 - Absolute Bank Term Loan — Bank Lending — 1.31.3 — 1.00.3 - Baku-Tbilisi-Ceyhan (BTC) Pipeline — Natural Resources — 1,763.042.5 — 42.50.0 - Enguri Hydro power Plant Rehabilitation project — Power and Energy — 62.033.1 — 33.10.0 - Georgian Property Equity Investment — Property and Tourism — 98.610.8 — 0.010.8 - Meinl Caucasus and Central Asia — Property and Tourism — 187.565.6 — 0.065.6 - Tbilisi International Airport — Transport — 52.018.3 — 18.30.0 - Regional TFP: TBC Bank (guarantee & pre-export) — Bank Lending — 36.236.2 — 36.20.0 - SOCAR - South Caucasus Gas Pipeline — Natural Resources — 34.66.1 — 6.10.0 - ProCredit Bank Georgia (various entries) — Small Business Finance — 8.64.7 — 2.02.7; 10.24.1 — 4.10.0; 10.25.4 — 5.40.0 - Aggregate line as presented in the source: - 3,014.1535.9 422.1113.8 ### Committed projects for First Half of 2008 — listed operations and EBRD finance (EUR) - Regional TFP: Bank of Georgia (Guarantee & Pre-export) — Bank Lending — Sub-operation under Regional Trade Facilitation Programme — 29.5 - MCFF Bank Republic - Mediclub Georgia — Bank Lending — Extension of the operating facilities of Mediclub Georgia via construction of a new private hospital. — 1.6 - Georgian Financial Sector F/W- Cartu Bank SME Loan — Small Business Finance — USD 7 million loan to Cartu Bank for on-lending to local SMEs. — 4.5 - Regional TFP: Bank Republic (Guarantee & Pre-export) — Bank Lending — Sub-project under Trade Facilitation programme — 3.2 - CEEP - Cartu Bank — Bank Lending/Energy Efficiency — Participating Bank under the Caucasus Energy Efficiency Programme. — 3.2 - CEEP – TBC — Bank Lending/Energy Efficiency — Participating Bank under the Caucasus Energy Efficiency Programme — 6.5 - MCFF TBC Bank — Bank Lending — 0.0 - TBC Bank SME Line — Bank Lending — USD 15 million SME Line — 9.7 - Basis Bank Equity Investment - Georgian Financial Sector F/W — Bank Equity — Equity Investment in Basis Bank — 2.8 - Number of projects = 9 - Total EBRD Finance (EUR) for these committed projects = 61.0 ### ETC initiative and regional role - Georgia is part of the “Early Transition Countries” (ETC) initiative (launched April 2004). - ETC objective: increase investments in the Bank’s seven poorest countries; focus on private sector business development and selected public sector interventions; use a streamlined approach to financing, focus on smaller projects, mobilize more investment, and encourage ongoing economic reform. - The Bank will accept higher risk in projects financed in the ETCs while respecting the principles of sound banking. - Since launch of the ETC initiative the Bank’s annual business volume in Georgia has been increased five times. - The EBRD is helping Georgia to benefit from its privileged location, transforming it into a regional transportation and natural resources hub. ### Statistical issues — data adequacy, quality, and reforms (Annex IV) - General assessment: - Data provision has some shortcomings, but is broadly adequate for surveillance and program monitoring. - The IMF has provided technical assistance in the compilation of macroeconomic statistics (Annex I, Table 1). - Despite improvements in national accounts, price, monetary, and government finance statistics, the quality of macroeconomic statistics remains poor, reflecting deficiencies in statistical methodologies, coverage, and insufficient resources. - Problems are particularly acute in national accounts, balance of payments, foreign trade, and fiscal statistics. - Transfer of responsibility for the balance of payments from the State Department of Statistics (SDS) to the National Bank of Georgia (NBG) in January 2007 led to improvements. - Data ROSC and GDDS: - The data module of the Report on the Observance of Standards and Codes (ROSC), prepared in July 2002, was published on the IMF’s external website on May 27, 2003. - A General Data Dissemination System (GDDS) mission in November helped finalize metadata and on December 15, 2006 Georgia began participation in the GDDS. - Real sector statistics: - National accounts follow System of National Accounts 1993. Annual and quarterly GDP estimates are compiled by both production and expenditure approaches. - Preliminary national accounts estimates are available after 85 days, and final estimates after 13 months. - The 2002 data ROSC mission identified weaknesses: inadequate coverage of the business register; poor coverage of units in agriculture, retail trade, construction, catering, and services; limited administrative sources for nonobserved economy; inadequate data for imports and exports of services (taken from balance of payments). - Follow-up missions in early 2004 and April 2005 found progress but scope for improving constant price estimates and developing supply and use tables. - STA missions in May/June 2006 and August/September 2007 reported important progress on agricultural price indices; inadequate funding was causing delays in implementation. - Authorities plan to upgrade CPI and PPI methodology, PPI specification, and dissemination practices. - Monetary and financial statistics: - A March 2002 STA mission found authorities had implemented many recommendations of December 2000 mission. - The July 2002 data ROSC found most elements in the data quality assessment framework for monetary statistics were fully or largely observed; recommended improvements in coverage of nonbank depository corporations and provision of metadata documentation; recommended increased transparency regarding access by governmental agencies to monetary statistics prior to public release. - NBG has begun compiling monetary data using STA’s Standardized Report Forms (SRF) and has been providing data regularly. Data have been published in the IFS Supplement since September 2006. Beginning from December 2001, data published in IFS have been revised in accordance with the SRF. - Government finance statistics: - GFS on a cash basis are reported to STA for publication in the GFS Yearbook. - The GFS mission of November 2006 found Georgia has embarked on reform to central and local government budget and accounting systems to fully adopt GFSM 2001 methodology and IPSASs. The strategy will be implemented in stages and is documented in Accounting Reform Strategy, 2007–17. - Authorities’ commitment to the accounting reform strategy is set out in Decree 101 issued by the minister of finance on February 10, 2006. Implementation of some steps will require amendments to the Budget System Law. - External sector statistics: - A September 2006 technical assistance mission assisted the authorities to prepare an action plan for transfer of balance of payments compilation from SDS to NBG; advised on structure of NBG’s new balance of payments division; developed framework for collection of source data; helped develop framework for compilation of an international investment position statement. - Balance of payments compilation function was transferred to NBG in mid-January 2007, although SDS will remain main provider of data for exports of goods and services and direct investment. - STA resident Statistics Advisor mission (April 23–May 4, 2007) major findings and recommendations included: - Amendments needed to Law on Statistics or National Bank Law to assign responsibility and authority for collection, processing and dissemination of international investment position and external debt statistics. - NBG should be represented on the National Statistics Council. - Government and NBG should agree to a data provision/data sharing scheme. - A Balance of Payments Expert Group should be established. - International transactions reporting system should be developed and data used in compilation of balance of payments statistics. - Specific improvements recommended for data collection for private sector liabilities and transactions of the Georgian Pipeline company, and further investigation of discrepancies between national data on portfolio investment liabilities and derived liability data from the Coordinated Portfolio Investment Survey. *Source: _cr08328 - 1. The Bank is currently focusing its efforts on developing infrastructure, reforming the (PDF content provided).* ### ANNEX V. GEORGIA: TENTATIVE WORK PROGRAM ### ANNEX V. GEORGIA: TENTATIVE WORK PROGRAM ### Tentative Work Program and Phasing of the Proposed SBA - Board discussion of an SBA with exceptional access: September 15, 2008 - Mission to conduct the first review under the SBA arrangement: October 2008 - Board discussion for first review: November 2008 - Mission to conduct the second review under the SBA arrangement: January 2009 - Board discussion for second review: March 2009 - Proposed SBA access and phasing (SDR mn; percent of quota; availability dates and purchases): - 2008 September (Approval): SDR 161.70 — 107.58 percent of quota (purchase upon approval) - 2008 November: SDR 63.10 — 41.98 percent of quota - 2009 February: SDR 63.10 — 41.98 percent of quota - 2009 May: SDR 47.30 — 31.47 percent of quota - 2009 August: SDR 47.30 — 31.47 percent of quota - 2009 November: SDR 47.30 — 31.47 percent of quota - 2010 February: SDR 47.30 — 31.47 percent of quota - Total: SDR 477.10 — 317.43 percent of quota - Note: "Starting in November 2008, purchases will depend on the completion of a review based on performance criteria for the end of the previous quarter." ### Background: Georgia–IMF Financial Relationship and Recent Use - Georgia became an IMF member in May 1992. - Past arrangements include: STF arrangement approved in 1994, a SBA approved in 1995, and three PRGF arrangements during 1996–2007. - Total Fund credit to Georgia: - Rose from zero in November 1994 to a peak of SDR 229 million in 2001. - Declined to SDR 145 million by end-July 2008 (Table 2 data). - As of mid-August 2008, outstanding PRGF loans: SDR 138.86 million (92.39 percent of quota) — note: excluded from some GRA figures in the assessment. ### Public Debt Structure and Creditor Composition (end-2007 and 2004–2007 data) - Georgia’s public debt as of end-2007: about 22 percent of GDP (US$2.2 billion at current exchange rates). - Public and publicly guaranteed debt (USD, end of year): - 2004: 1,858 - 2005: 1,735 - 2006: 1,697 - 2007: 1,790 - Multilateral portion of public external debt: - 2004: 1,102 - 2005: 1,053 - 2006: 1,140 - 2007: 1,263 - IMF share of public external debt (USD): - 2004: 265 - 2005: 233 - 2006: 236 - 2007: 249 - World Bank (USD): - 2004: 678 - 2005: 679 - 2006: 784 - 2007: 883 - Breakdown (percent of total public external debt, end-2007): - Multilateral: 70.5 percent - IMF: 13.9 percent - World Bank: 49.4 percent - Bilateral: 29.0 percent - Paris Club: 23.9 percent - Commercial: 0.4 percent - Memorandum: Total external debt (nominal stock): US$3,136 million (end-December 2007). ### Recent Sovereign Market Developments (August 2008 conflict effects) - Georgia issued its first Eurobond in April 2008 for US$500 million at a coupon rate of 7.5 percent. - After armed conflict in early August 2008: - Secondary market spread on Georgia’s Eurobond rose to some 300 basis points above the EMBI average. - Spread became some 100 basis points above the spread on Ukraine’s debt (which had the same price as Georgia’s debt the month prior to the conflict). - Spreads on privately issued debt (mainly from commercial banks) increased to some 700 basis points above the sovereign spread. - Figure 2 referenced yields (January–August 2008) including EMBIG sovereign yield, Georgia (5-year US$ bond), and Ukraine yields. ### Risks and Impact on the Fund's Finances from the Proposed SBA - Proposed SBA request: 18-month arrangement with access of SDR 477.1 million (317.4 percent of quota). - Front-loading: SDR 161.7 million (about 108 percent of quota) upon approval. - Purchase schedule summarized above under phasing. - If the proposed SBA is drawn in full: - Georgia’s total outstanding use of Fund resources would reach almost 6 percent of GDP. - More than 80 percent of this amount will be from the GRA. - Georgia’s outstanding use of Fund resources relative to GDP would be lower than comparable ratios for recent exceptional access cases after their last arrangement approval, but higher than in three of the four current largest users of Fund resources (only Liberia would owe more relative to GDP). - Georgia’s outstanding use of Fund resources would account for 24 percent of public external debt by February 2010. - Outstanding use of the Fund’s GRA resources would account for more than 80 percent of that 24 percent share. - Comparisons (public debt ratios, percent of GDP): - Exceptional access cases (examples): Argentina (2003) Total Public Debt 149.4; Brazil (2003) 85.9; Turkey (2005) 71.6; Uruguay (2005) 75.8. - Georgia (2007): Total Public Debt 22.4; Public External Debt 17.5; Debt to IMF 2.5 (percent of GDP). - Fund GRA exposure to current largest borrowers (as of end August 2008; Georgia assumes proposed SBA drawn in full): - Turkey: In SDR Millions 6,037.57; In Percent of Total GRA credit 8.95; In Percent of Quota 506.8; In Percent of GDP 1.3 (note: percent of GNP for Turkey in source table footnote). - Dominican Republic: SDR 350.24; 4.61; 60.0; 1.4 - Liberia: SDR 342.84; 4.52; 65.3; 5.7 - Sudan: SDR 220.92; 2.91; 30.2; 2.5 - Georgia: SDR 477.16; 6.23; 317.4; 4.7 - Fund’s share in public debt in recent exceptional access cases (percent): - Argentina: Total Public Debt 157; Public External Debt 26 - Brazil: 226; 28 - Turkey: 229; 33 - Uruguay: 262; 234 - Georgia (ratio of outstanding PRGF loans plus full amount of proposed SBA to staff projection of public debt in 2010): Total Public Debt 24; Public External Debt 22; of which GRA 20; GRA share in Public External Debt 18; Debt to IMF 15 (table formatting in source reflects multiple columns) ### Prudential and Liquidity Effects on the Fund - If all purchases are made as scheduled, Georgia’s outstanding use of Fund resources would slightly exceed the cumulative access limit (300 percent of quota) towards the end of the proposed SBA. - Georgia’s outstanding use of the Fund’s GRA resources would reach 317 percent of quota in February 2010, and remain at this level through November 2011. - Surcharges applicable to repurchases: - Surcharges of 100 basis points over the adjusted rate of charge on the credit outstanding exceeding 200 percent of quota from May 2009 to January 2013. - Surcharges of 200 basis points on the credit outstanding exceeding 300 percent of quota (SDR 25 million) from February 2010 to November 2011. - Table 7 — Impact on GRA Finances (selected figures; in millions of SDRs, end of period unless noted): - Fund GRA credit outstanding to Georgia: - 2008: 224.84 - 2009: 429.84 - 2010: 477.14 - 2011: 456.93 - 2012: 303.19 - 2013: 90.7 - One-year Forward Commitment Capacity (FCC): 127,900.0 - Georgia's impact on FCC: (477.1) - Fund's precautionary balances: 6,938.6 - Fund's residual burden sharing capacity: 60.2 - Georgia's GRA credit outstanding (percent of current precautionary balances) by year: - 2008: 3.2 - 2009: 6.2 - 2010: 6.9 - 2011: 6.6 - 2012: 4.4 - 2013: 1.3 - Georgia's annual GRA charges (percent of Fund's residual burden sharing capacity): - 2008: 3.3 - 2009: 22.3 - 2010: 4.6 - 2011: 35.6 - 2012: 30.4 - 2013: 15.8 - Memorandum items (staff projections): - Georgia's GRA credit outstanding (percent of total public external debt): - 2008: 12.9 - 2009: 18.8 - 2010: 20.0 - 2011: 19.1 - 2012: 13.1 - 2013: 4.2 - Georgia's GRA credit outstanding (percent of GDP): - 2008: 2.7 - 2009: 4.9 - 2010: 4.8 - 2011: 4.1 - 2012: 2.4 - 2013: 0.6 - Georgia's GRA credit outstanding (percent of gross international reserves): - 2008: 28.4 - 2009: 38.8 - 2010: 38.9 - 2011: 35.0 - 2012: 22.3 - 2013: 6.9 - Georgia's GRA debt service to the Fund (percent of exports of goods and services): - 2008: 0.1 - 2009: 0.5 - 2010: 0.7 - 2011: 1.2 - 2012: 4.7 - 2013: 5.5 - Georgia's total debt to the Fund (percent of total public external debt): - 2008: 20.8 - 2009: 24.1 - 2010: 24.4 - 2011: 22.7 - 2012: 16.0 - 2013: 6.5 - Georgia's debt service to the Fund (percent of total public external debt service): - 2008: 22.0 - 2009: 28.1 - 2010: 29.7 - 2011: 40.8 - 2012: 69.1 - 2013: 36.2 - Projected payment of charges to the Fund on GRA credit outstanding: - 2008: 2.0 - 2009: 13.5 - 2010: 20.8 - 2011: 21.4 - 2012: 18.3 - 2013: 9.5 - Projected debt service payments to the Fund on GRA credit outstanding: - 2008: 2.0 - 2009: 13.5 - 2010: 20.8 - 2011: 41.7 - 2012: 172.1 - 2013: 222.0 - Definition notes from the source: - The Forward Commitment Capacity is equal to usable resources plus repurchases one-year forward minus the prudential balance. - A single country's negative impact on the FCC is defined as the country's sum of Fund credit and undrawn commitments minus repurchases one-year forward. - Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges. ### Repayment and Debt Service Implications for Georgia - Georgia’s scheduled repayments to the PRGF: average SDR 18 million (12 percent of quota) per annum for the next several years (pre-SBA context). - If fully drawn, projected service under the proposed 18-month SBA would average SDR 160 million (107 percent of quota) in 2012–14 (repurchase schedule on an obligation basis). - As a result, total payments to the Fund would average close to SDR 180 million in 2012–14, compared with an average of about SDR 30 million in recent years. - The recently issued US$500 million Eurobond matures in 2013 and, unless rolled over, would add further strains to Georgia’s external debt servicing capacity. *Prepared by the Finance and Strategy, Policy, and Review Departments; approved by Andrew Tweedie and Adnan Mazarei; September 12, 2008.* ### 10. Against this background, the main risks to Georgia's capacity to repay the Fund ### 10. Against this background, the main risks to Georgia's capacity to repay the Fund ### Main risks to Georgia's capacity to repay the Fund - A greater-than-anticipated slowdown in private capital flows. - Georgia’s near-term macroeconomic stability hinges on avoiding net outflows of private capital and/or large losses of reserves and catalyzing a recovery in the medium term. - If the recent conflict turns out to have greater (or longer lasting) adverse effects on FDI flows (the main driver of private capital flows in Georgia) than envisaged in the program, the balance of payments position, and consequently Georgia’s capacity to repay the Fund, will be weaker. - A further deterioration of banks’ balance sheets. - Banks’ large exposure to the real estate sector and their high liability dollarization (both in their deposit base and for wholesale financing) make them particularly vulnerable, especially in view of the strong credit expansion of recent years. - A further loss of confidence from depositors or external creditors may exacerbate those vulnerabilities, put pressures on the capital account, reserves and the exchange rate, and give rise to significant liabilities for the government. - Weak program implementation. - Notwithstanding Georgia's track record of sound macroeconomic management, new political realities and/or increased domestic tensions, including pressures to support the banking system or other sectors affected by the conflict, will create challenges for continued fiscal restraint and non-inflationary financing of government expenditures. - An escalation of regional or domestic tensions. - Continued or recurrent bouts of violence and political uncertainty would have adverse effects on Georgia’s balance of payments above and beyond their impact on investors’ confidence, disrupting normal economic activity and foreign trade flows. - A less benign external environment. - Adverse shocks to Georgia’s terms of trade or to the global or regional supply of FDI, or a weakening of external demand could lead to a deterioration in Georgia’s balance of payments position and its capacity to repay the Fund. ### Authorities' role and safeguards - The authorities' resolve to implement the policies contemplated in the proposed SBA provides a key safeguard to Fund resources. - The authorities have a strong track record of Fund program implementation. - Adhering to their track record of prudent fiscal and monetary policies and economic reform, and developing the capacity to respond quickly to a larger-than-envisaged deterioration of the balance of payments, will be key to limiting the risk of severe balance of payments pressures and/or a financial crisis. ### Impact on the Fund's liquidity position and exposure - The impact of the proposed SBA on the Fund's liquidity position will be modest. - The proposed SBA would reduce the one-year forward commitment capacity (FCC) by SDR 477 million, about 0.4 percent of the FCC as of end-August—SDR 127.9 billion. - The potential GRA exposure to Georgia is moderate in relation to the current level of reserves. - As a share of the Fund’s current level of precautionary balances, outstanding GRA credit to Georgia would be 3 percent in December 2008 and rise to close to 7 percent by December 2010. ### Burden-sharing, charges, and arrears risk - In an environment of low credit, arrears incurred by Georgia on the charges accruing to its GRA obligations could put significant strain on the Fund’s burden sharing mechanism. - Charges on the new GRA obligations will average about SDR 19 million per annum over the next three years. - This is equivalent to about 31 percent of the Fund’s residual burden-sharing at mid-August 2008. - Burden sharing such arrears would imply an increase in the rate of charge of about 12 basis points. - Notes on the burden-sharing context: - Residual burden sharing is equal to total burden-sharing capacity minus the amount currently being utilized to offset unpaid charges. - The estimated impact is based on the floor for remuneration at 85 percent of the SDR interest rate. - The maximum burden sharing capacity at mid-August 2008 was SDR 72.9 million, of which SDR 60.2 million represented the residual capacity. ### Assessment and conclusion - There are significant financial risks associated with the proposed arrangement for Georgia. - Although the size of the credit is relatively small (in SDR terms) and Georgia’s outstanding use of Fund resources will account for a small share of the Fund’s GRA credit outstanding, there are many factors that may affect adversely, and quickly, Georgia’s balance of payments and its capacity to repay the Fund. - Those factors include a sudden stop of capital flows (FDI or external credit lines to banks), renewed bouts of deposit withdrawals, renewed hostilities, and heightened social tensions and political uncertainties. - Any one of these factors, in isolation, can lead to large loss of reserves and a currency and/or financial crisis. - Georgia’s capacity to repay the Fund could be substantially impaired in such a scenario. - Key mitigants: - A quick and peaceful resolution of regional tensions. - The authorities’ resolve to adhere to the policies contemplated in the proposed SBA. *Source: _cr08328 - 10. Against this background, the main risks to Georgia's capacity to repay the Fund* ### 16. Georgia's capacity to repay the Fund hinges on maintaining a viable external ### _cr08328 - 16. Georgia's capacity to repay the Fund hinges on maintaining a viable external ### External position and capacity to repay - Georgia's capacity to repay the Fund hinges on maintaining a viable external position. - Required policy priorities: - Significantly reduce the external current account deficit. - Continue attracting non-debt creating capital flows. - Re-build reserves. - Necessary conditions and safeguards: - Continued adherence to prudent macroeconomic policies. - Progress on economic reform. - Timely policy responses to possible new shocks. ### Stand-By Arrangement (Press Release No. 08/208, September 15, 2008) - Executive Board approved an 18-month Stand-By Arrangement (SBA) with total access equivalent to SDR 477.1 million (about US$750 million). - The SBA involves exceptional access (exceeding 100 percent of Georgia’s IMF quota annually and 300 percent cumulatively, net of scheduled repurchases). - Disbursement schedule: - Immediate availability: SDR 161.7 million (US$250 million). - Remaining balance distributed in six installments over the next 18 months. - Program objectives: - Rebuild gross international reserves. - Bolster investor confidence to sustain private capital inflows. - Limit deterioration in external accounts via containing the fiscal deficit, maintaining a cautious monetary stance, and strengthening the financial sector. - Short-term focus: - Avoid liquidity disruptions while accepting higher fiscal spending on reconstruction. - Reduce current spending to free resources for relief and reconstruction. - Accommodate concessional loans and grants within fiscal targets. - Provide sufficient liquidity to the banking system while maintaining a stable exchange rate and adequate international reserves. - Short-term policy: avoid excessive exchange rate volatility; envisage a return to a flexible exchange rate regime. - Strengthen Financial Supervision Agency (FSA) independence and capacity and enhance cooperation between the Agency and the central bank. ### Background and program summary - Shock and context: - Early-August armed conflict led to pressures on the capital account: decline in international reserves, fall in bank deposits, increased Eurobond spreads. - Prior performance: before the conflict, economic growth reached double digits, with inflation around 10 percent. External current account deficit reached 20 percent of GDP in 2007 and was fully financed by private capital inflows, particularly foreign direct investment. - Program design: - Make significant resources available to replenish international reserves and bolster investor confidence to sustain private capital inflows. - Limit deterioration in external accounts through fiscal containment, cautious monetary stance, and financial sector strengthening. - Financing and reconstruction: - Currently available financing for 2008–09: proceeds of the $500 million Eurobond issued in 2008, and privatization receipts, to be complemented by donors’ support. - Staff projected financing gap of about $1.2 billion over 2008-09; IMF expected to partially cover this gap. - Fund credit to be used solely to bolster central bank reserves and not to finance the fiscal deficit. - Initial drawing under the SBA intended to shore up reserves close to targeted level and help rebound investor confidence. - Fiscal policy stance: - Targets: fiscal deficit of 6 percent in 2008 and 3¾ percent in 2009 (subject to upward adjustor if concessional donor financing exceeds pre-conflict commitments). - Ministry of Finance to produce annual reports on consolidated public expenditures and public arrears and debt. - Reconstruction costs provisionally estimated at around $ 1 billion, including resettlement costs for displaced persons; much expected to be financed by donor grants. - Monetary and financial sector policy: - Monetary policy to provide sufficient liquidity, maintain single-digit inflation, and adopt an inflation-targeting regime in the course of 2009. - Near-term monetary guidance: quarterly targets for net international reserves and net domestic assets of the NBG as set out in the program. - NBG actions: waive reserve requirements temporarily; activate an uncollateralized lending facility; develop a liquidity management framework; revise lender of last resort facility to avoid encouraging excessive risk-taking. - FSA actions: assess banking sector vulnerabilities via on-site inspections; ensure banks have contingency plans; strengthen cooperation and information exchange with NBG. - Authorities welcome a streamlined and focused FSAP update mission in the second half of 2009. ### Macroeconomic projections and key indicators (2006–09, as presented) - Real GDP growth: 2006: 9.4; 2007: 12.4; 2008: 3.5 (Prel.); 2009: 4.0 (Proj.) - Population (million) 1/: 2006: 4.3; 2007: 4.4; 2008: 4.4; 2009: 4.4 - Consumer price index, period average: 2006: 9.2; 2007: 9.2; 2008: 10.0; 2009: 7.6 - Consumer price index, end-of-period: 2006: 8.8; 2007: 11.0; 2008: 8.0; 2009: 8.0 - GDP per capita (US$): 2006: 1,800; 2007: 2,324; 2008: 2,895; 2009: 3,167 - Poverty rate (in percent): 2006: 31.0 - Unemployment rate (in percent): 2006: 13.6; 2007: 13.3 - Investment (percent of GDP): 2006: 25.6; 2007: 28.1; 2008: 23.7; 2009: 22.2 - Public: 2006: 2.5; 2007: 3.4; 2008: 3.6; 2009: 5.6 - Private: 2006: 23.0; 2007: 24.7; 2008: 20.1; 2009: 16.6 - Gross national saving (percent of GDP): 2006: 9.7; 2007: 8.1; 2008: 2.9; 2009: 3.5 - Public: 2006: 5.9; 2007: 4.2; 2008: 1.0; 2009: 2.9 - Private: 2006: 3.7; 2007: 3.8; 2008: 1.9; 2009: 0.6 - Saving-investment balance (percent of GDP): 2006: -15.9; 2007: -20.0; 2008: -20.8; 2009: -18.7 - Consolidated government operations (percent of GDP): - Revenue: 2006: 26.7; 2007: 29.2; 2008: 27.7; 2009: 26.0 - Expenses: 2006: 20.8; 2007: 25.0; 2008: 26.6; 2009: 23.1 - Operational balance: 2006: 5.9; 2007: 4.2; 2008: 1.0; 2009: 2.9 - Capital spending and net lending: 2006: 9.0; 2007: 9.0; 2008: 7.3; 2009: 6.7 - Total balance: 2006: -3.0; 2007: -4.7; 2008: -6.3; 2009: -3.8 - Statistical discrepancy: 2006: 0.0; 2007: 0.2; 2008: 0.3; 2009: 0.0 - Total financing (program definition): 2006: 3.0; 2007: 4.5; 2008: 5.9; 2009: 3.8 - Domestic: 2006: -1.7; 2007: -0.9; 2008: 1.3; 2009: -0.3 - External: 2006: -0.4; 2007: 0.2; 2008: 1.5; 2009: 3.1 - Use of Sovereign Wealth Fund resources: 2006: 0.0; 2007: 0.0; 2008: -2.8; 2009: 2.5 - Privatization receipts: 2006: 5.2; 2007: 5.2; 2008: 3.2; 2009: 0.9 - Monetary sector (annual percentage change): - Reserve money: 2006: 19.2; 2007: 5.6; 2008: 19.0; 2009: 12.0 - Broad money (including foreign exch. deposits): 2006: 39.3; 2007: 49.6; 2008: 14.0; 2009: 18.0 - Private credit: 2006: 53.4; 2007: 68.9; 2008: 21.2; 2009: 15.2 - External sector: - Exports of goods and services (percent of GDP): 2006: 33.1; 2007: 31.7; 2008: 27.6; 2009: 29.2 - Annual percentage change (exports): 2006: 17.6; 2007: 26.1; 2008: 13.1; 2009: 11.5 - Imports of goods and services (percent of GDP): 2006: 56.8; 2007: 57.8; 2008: 53.4; 2009: 52.9 - Annual percentage change (imports): 2006: 33.0; 2007: 34.0; 2008: 20.0; 2009: 4.1 - Current account balance (in millions of US$): 2006: -1,235; 2007: -2,047; 2008: -2,757; 2009: -2,618 - In percent of GDP: 2006: -15.9; 2007: -20.0; 2008: -20.8; 2009: -18.7 - Gross international reserves (in millions of US$): 2006: 881; 2007: 1,361; 2008: 1,270; 2009: 1,755 - In months of next year's imports of goods and: 2006: 1.8; 2007: 2.3; 2008: 2.1; 2009: 2.6 - Foreign direct investment (percent of GDP): 2006: 13.9; 2007: 15.3; 2008: 9.3; 2009: 8.6 - Sources cited in the table: Georgian authorities; and Fund staff estimates. - Note: Population excludes Abkhazia residents. ### Authorities' assessment and outlook (Statement by Age Bakker, Executive Director for Georgia, September 15, 2008) - Past performance: - PRGF arrangement completed successfully in September 2007 supported reforms underpinning recent strong macroeconomic performance. - Growth driven by private capital inflows; by 2007 private capital inflows had increased to $2.2 billion (22 per cent of GDP). - Current account deficit reached 26 per cent of GDP in the first half of 2008. - Exports: average annual growth of 26 per cent over 2003–07; diversification improved. - Institutional reforms: central bank law amended to make price stability the primary objective; NBG to target single-digit inflation; new independent FSA created for consolidated supervision. - Impact of the conflict: - Loss of investor confidence; disrupted economic activity; risk of sharp reserve decline without international support. - Staff projection of a financing gap of about $1.2 billion over 2008-09. - Expectations and targets: - Private inflows anticipated to pick up modestly in 2009 and sustain higher investment; export growth expected to increase gradually. - Real GDP growth projected to recover to mid single digits. - Inflation expected to remain in single digits and decline gradually. - Current account deficit expected to decrease over time to around 16 per cent of GDP in 2010. - Commitment: - Authorities fully committed to a flexible exchange rate policy; priority to maintain targeted level of international reserves with allowance for exchange rate adjustment to foreign inflow shortfalls. - Authorities committed to maintain a sound macroeconomic fiscal framework and to structurally minimize fiscal footprint. - Authorities stand ready to take additional measures if necessary and to maintain close policy dialogue with the Fund. *Italic: IMF Executive Board press release, Annex, and related statements (September 15, 2008).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08328.pdf_