## _cr10219

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---

### Executive Summary — Program performance and outlook
- All end-March program targets were met:
  - NIR was well above target; foreign exchange intervention was kept below agreed limits despite a shortfall in privatization revenues and project loans.
  - NDA was comfortably below the ceiling.
  - The fiscal deficit was below the ceiling by a wide margin (1.2 percent of annual GDP).
- End-June program targets: expected to be met except the NIR target, likely missed due to delayed exchange rate adjustment to pressures in April-May; corrective measures have been taken.
- Growth and inflation:
  - Real GDP growth for 2010 revised up from 2 to 4½ percent.
  - CPI inflation dropped to 4 percent in May; expected to stabilize at around 5 percent.
- External sector and capital flows:
  - 2010 current account deficit projected at 12.6 percent of GDP.
  - FDI inflows in Q1: $76 million; annual FDI revised downward to below 2009 levels.
  - Banks expected to generate net financial inflows as they repatriate foreign assets to meet reserve requirements on external liabilities.
- Financial sector and credit:
  - Nascent recovery of credit growth; all loan growth in local currency.
  - Banking system capital adequacy: 17.6 percent (May); high NPLs remain a risk.
- Exchange rate and reserves:
  - Cumulative depreciation vis-à-vis the U.S. dollar: 10 percent since the beginning of the year (as of June 23); 9 percent as of July 6 (staff statement).
  - Policy shifted toward faster depreciation, limited intervention, and tighter fiscal and monetary policies.

### Policies for 2010 and corrective measures
- Exchange rate policy:
  - Lari depreciated by 5 percent since the beginning of the year through April 2010; cumulative depreciation 10 percent as of June 23.
  - June 4 action: authorities reduced dollar supply at auction; rate depreciated by 8 percent by end of day.
  - Forward measures: limit intervention and auction frequency to once a week to promote market trading.
  - Projected shortfall in private capital inflows relative to the fifth review: US$276 million (2.6 percent of GDP); offset by improved current flows and higher official transfers.
- Fiscal policy:
  - Targeted faster deficit reduction: from 9.2 percent of GDP in 2009 to 6.3 percent in 2010.
  - End-June budget deficit target to be met; revenues projected above target due to stronger GDP growth; spending under-executed partly due to delays in foreign-financed capital projects.
  - Supplementary budget initially allocated 85 percent of projected revenue gain to new spending (+1.1 percent of GDP); in June scaled back yielding net 0.5 percent of GDP impact on 2010 budget:
    - 0.2 percent of GDP from scaling back supplementary spending.
    - 0.3 percent of GDP from new excises effective August 1, 2010.
  - Additional revenue measures equivalent to 0.9 percent of GDP effective January 1, 2011 (including income tax harmonization and VAT base expansion).
  - Spending cap adopted for the rest of 2010; implementation of referendum requirement on tax increases postponed.
- Monetary policy and credit conditions:
  - Central bank refinancing rate raised from 5 to 6¼ percent on June 16.
  - Reserve requirement on lari deposits raised from 5 to 10 percent; required reserve excess of 5 percent remunerated at the policy rate.
  - New standing facility and a 7-day collateralized refinancing facility introduced; access limited to GEL 200 million per week.
  - Projected annual growth in credit to the economy revised up from 6 to 9½ percent relative to the fifth review.
  - Monetary tightening begun in June; additional interest rate increases likely to preserve price and external stability.

### Fiscal adjustment composition and public finances
- Fiscal targets and composition:
  - 2010 fiscal deficit target reduced from 7.4 percent of GDP (fifth review) to 6.3 percent (sixth review).
  - Structural deficit (percent of GDP): 2009: -6.2; 5th Rev.: -3.3; 6th Rev.: -3.6.
  - Overall deficit (percent of GDP): 2009: -9.2; 5th Rev.: -7.4; 6th Rev.: -6.3.
  - Fiscal impulse: 2009: 4.0; 5th Rev.: -1.1; 6th Rev.: -1.8.
- Fiscal adjustment (selected items, percent of GDP):
  - Total reduction in fiscal deficit, 2009-10: 2.9 percent of GDP; 2010-14: 4.4 percent of GDP.
  - Policy adjustment and automatic stabilizers (2009-10): 2.5 percent of GDP; (2010-14): 7.1 percent of GDP.
  - Increase in revenues (2009-10): 0.4 percent of GDP; (2010-14): 0.7 percent of GDP.
    - Tax revenues (2009-10): 0.8 percent of GDP; (2010-14): 1.1 percent of GDP.
  - Decrease in expenditures (2009-10): 2.1 percent of GDP; (2010-14): 6.4 percent of GDP.
    - Current spending (2009-10): 2.2 percent of GDP; (2010-14): 3.5 percent of GDP.
    - Capital spending (2009-10): -0.6 percent of GDP; (2010-14): 3.1 percent of GDP.
- Financing and debt management:
  - Overall balance-of-payments need covered by Fund financing in 2010: US$446 million.
  - External public debt-to-GDP ratio: peak 43.2 percent in 2011; decline to 32.7 percent by 2015.
  - Government tapped domestic market with one year and two year paper; rising T-bill rates constrain further domestic financing to avoid crowding out private credit.
  - Indicative ceiling on nonconcessional public external borrowing proposed to be replaced by an indicative ceiling on total public external borrowing.

### Medium-term outlook, exit strategy, and risks
- Exit strategy:
  - Predicated on steady increase in private capital inflows (mainly FDI) enabling re-access to private capital markets by 2012.
  - Program built on assumed slower recovery of FDI; reliance on substantial pickup in private capital inflows remains a key risk.
- Alternative scenario with lower FDI (Box 2):
  - Assumption: FDI stabilizes at 6½ percent of GDP (2010 level), unchanged productivity of capital.
  - Macroeconomic impact: real GDP growth falls to 3½ percent on average over next 5 years.
  - Balance of payments gap relative to baseline: 0.8 percent of GDP on average over 2011–15; rises to 1.5 percent of GDP by 2015.
  - Loss of international reserves: US$466 million by 2015.
  - Fiscal impact: deficit would rise and reach 4.3 percent of GDP by 2015 under baseline fiscal policy.
- Selected comparisons (Alternative Medium-Term Scenarios, 2011–15):
  - Real GDP growth (2011-15 average): 5th Review baseline: 4.8; low growth: 3.5.
  - Investment rate (2011-15 average): 5th Review baseline: 20.0; low growth: 13.4.
  - Foreign direct investment (percent of GDP): 11.4; 8.9; 6.5; 12.3; 9.4; 6.5 (presented in source order).
- Contingency measures:
  - If significant balance-of-payments pressures reemerge, authorities would accelerate monetary tightening, reduce the deficit, and continue to rely on exchange rate adjustment.

### Debt, program adjustments, and IMF decisions
- IMF staff decision / program action:
  - Staff supports completing the sixth review, modifying and establishing performance criteria, and rephasing purchases by combining the seventh and the eighth reviews.
- Key macro projections (selected):
  - Nominal GDP (million lari): 19,075 (2008 Act.); 17,949 (2009 Prel.); 19,657 (2010 Proj.); 21,465 (2011 Proj.); 23,665 (2012 Proj.); 26,091 (2013 Proj.); 28,765 (2014 Proj.); 31,714 (2015 Proj.)
  - Real GDP growth: 2.3 (2008 Act.); -3.9 (2009 Prel.); 4.5 (2010 Proj.); 4.0 (2011 Proj.); 5.0 (2012–2015 Proj. each year).
  - Current account (percent of GDP): -22.7 (2008); -11.9 (2009); -12.6 (2010); -13.2 (2011); -12.6 (2012); -11.6 (2013); -10.7 (2014); -9.6 (2015).
  - Gross international reserves (US$ million): 1,480 (2008); 2,110 (2009); 2,213 (2010); 2,308 (2011); 2,238 (2012); 2,064 (2013); 2,044 (2014); 2,221 (2015).
  - Total government debt (percent of GDP): 25.0 (2008); 37.1 (2009); 46.1 (2010); 49.3 (2011); 47.1 (2012); 45.1 (2013); 42.2 (2014); 40.5 (2015).
- Fund financing and schedule:
  - SBA total available: SDR 747.1 (497.1 percent of quota); stock of existing Fund credit (SDR, end of period): 298.8 (2008); 501.6 (2009); 632.1 (2010); declining thereafter.
  - Prospective purchases: sixth review purchase SDR 50.0 (9-Jul-10 listing); seventh and eighth combined: SDR 100.0 (15-Nov-10 listing).

### Financial sector resilience and stress testing
- Banking system indicators:
  - Capital adequacy: 17.6 percent (May).
  - NPLs: 17.6 percent (NBG definition); slightly less than 8 percent (IMF definition).
  - Stress test: one-time 15 percent depreciation would, within 1 year, reduce capital adequacy by 5.3 points (3.8 points due to higher provisioning; remainder from valuation).
  - Analysis assumes a 5 percent elasticity of NPLs to exchange rate change, implying NPLs could rise from 18 percent to 27 percent of the loan portfolio (assumed elasticity may be an upper bound).
- Monetary program assumptions:
  - Built on expected continued growth in deposits and slight deceleration of credit growth in H2 2010 due to tightening and possible increase in NPLs.

### Staff appraisal and policy recommendations
- Recovery and risks:
  - Economic recovery gained strength; balance of risks in 2010 shifted from domestic to external factors due to global financial market turbulence.
  - Orderly municipal elections and resumption of credit growth support confidence.
- Corrective actions endorsed:
  - Faster depreciation starting in June and tightening of monetary and fiscal policies should address earlier exchange rate pressures.
  - Exchange rate flexibility is key to externally sustainable recovery; NIR targets constrain intervention to guard against inadequate exchange rate adjustment.
- Fiscal recommendations:
  - Adoption of additional revenue measures and commitment to capping spending in 2010 are appropriate.
  - Authorities encouraged to target ambitious deficit reduction in 2011 to build buffers ahead of 2012 and 2013 election years.
- Monetary and banking recommendations:
  - Continued monetary tightening and flexible policy interest rate adjustments are warranted.
  - Higher interest rates would encourage dedollarization; banking sector balance sheet impacts from depreciation require close monitoring.
- Exit strategy caveat:
  - Program assumes slower FDI recovery; a failure of FDI inflows to materialize in H2 2010 would require more fundamental policy changes; authorities’ contingency plans provide for timely responses.

*Source: IMF staff—Executive Summary and staff report content unit: _cr10219.*

### Executive Summary ......................................................................................................

### Executive Summary

### I. Program Performance
- All end-March program targets were met:
  - NIR was well above target; foreign exchange intervention was kept below agreed limits despite a shortfall in privatization revenues and project loans.
  - NDA was comfortably below the ceiling due to lower net lending to banks and higher accumulation of government deposits.
  - The fiscal deficit was below the ceiling by a wide margin (1.2 percent of annual GDP) owing to a revenue windfall from higher growth and underexecution of spending—explained in part by implementation delays of foreign-financed capital projects.
- End-June program targets are expected to be met with the exception of the NIR target, which will likely be missed due to delayed exchange rate adjustment to pressures in April-May.
- Corrective measures have been taken to address the underlying imbalance.

### II. Recent Developments and Outlook for 2010
- Political:
  - The orderly conclusion of the May 30 municipal elections removed uncertainty that was weighing on confidence. The ruling party retained control of Tbilisi and major cities.
- Growth and inflation:
  - Real GDP growth for 2010 has been revised up from 2 to 4½ percent, based on two consecutive quarters of solid expansion of economic activity and the resumption of credit growth supported by a gradual lowering of interest rates.
  - CPI inflation dropped to 4 percent in May, but is expected to stabilize at around 5 percent.
- External sector and capital flows:
  - Despite the acceleration of economic activity, the current account deficit in the first quarter was lower than expected due to improved terms of trade, while private capital inflows remained low.
  - The 2010 current account deficit is now projected at 12.6 percent of GDP.
  - FDI inflows in the first quarter were very weak ($76 million), prompting a downward revision of annual FDI inflows to below the level of 2009.
  - Banks are expected to generate net financial inflows as they repatriate foreign assets to meet recently announced reserve requirements on external liabilities.
- Financial sector and credit:
  - There are signs of a nascent recovery of credit growth, supported by a gradual lowering of deposit and lending rates over the past year. All of the growth in lending has been in local currency.
  - Banks’ balance sheets are cushioned by ample levels of capital and provisioning, but the high level of NPLs remains a risk factor.
- Exchange rate and reserves:
  - End-March quantitative performance criteria (NIR, NDA, and the fiscal deficit) were met with ample margins. The end-June NIR will likely be missed as a result of a delayed exchange rate adjustment to persistent pressures in April-May.
  - Since then, fiscal and monetary policies have been tightened and the exchange rate has been allowed to depreciate faster, buttressing the exit strategy and supporting external sustainability.
- Risks:
  - The projection is tempered by higher external risks associated with problems in the Euro zone.
  - The exit strategy’s reliance on a substantial pick up of private capital inflows, and FDI in particular, remains a risk factor.

### III. Policies for 2010, the Medium-Term Outlook, and the Exit Strategy
- Overview:
  - Based on an expected easing of seasonal foreign exchange market pressures, policy discussion in early May focused on consolidating the exit strategy in the context of an improved growth outlook.
  - The persistence of exchange rate pressures and the related downward revision of projected FDI inflows in 2010 required policies to be revisited in June toward faster fiscal and exchange rate adjustments, and monetary tightening.

A. Exchange Rate Policy
- Recent management and adjustments:
  - Through April 2010, the exchange rate was managed flexibly; the lari depreciated by 5 percent since the beginning of the year vis-à-vis the U.S. dollar (the currency of reference).
  - In the face of seasonal foreign exchange market pressures, exchange rate policy was rebalanced in favor of more depreciation and less intervention compared with the same period in 2009.
  - As exchange rate pressures persisted into May, the authorities increased intervention to contain the rate of depreciation, and will likely fail to observe the end-June NIR target. This policy choice reflected their view that pre-election uncertainty was driving pressures, which would reverse in June.
  - With signs of weaker-than-expected FDI inflows, the authorities acknowledged a structural component to the foreign exchange market imbalance, requiring faster exchange rate adjustment. More expansionary fiscal and monetary policies in the second quarter were recognized as additional contributing factors.
- June actions and outcomes:
  - On June 4, the authorities reduced considerably the volume of dollars offered at auction. The rate depreciated by 8 percent by the end of the day; some follow up intervention was required to stabilize public expectations.
  - As of June 23, cumulative depreciation vis-à-vis the U.S. dollar was 10 percent since the beginning of the year, and market conditions had stabilized.
- Forward policy measures:
  - To reinforce exchange rate flexibility, the authorities plan to limit intervention and the frequency of auctions to once a week (LOI, ¶25).
  - These measures should promote foreign exchange trading within the market and ensure faster and smoother exchange rate adjustment.
  - Foreign exchange inflows are expected to pick up due to seasonal factors (tourism and remittances) and an acceleration of private capital inflows in the second half of the year, riding on stronger GDP growth, the orderly conclusion of local elections, and a stronger privatization drive.
- Balance of projections:
  - Under the revised program, the projected shortfall in private capital inflows relative to the fifth review (by US$276 million, or 2.6 percent of GDP) is more than offset by improved current flows and higher official transfers.
  - Despite the higher GDP growth, the current account deficit is revised downward by US$189 million, mainly on account of improved terms of trade.

B. Fiscal Policy
- Consolidation and targets:
  - The cyclical rebound is being used to achieve a faster pace of deficit reduction from 9.2 percent of GDP in 2009 to 6.3 percent in 2010.
  - Based on preliminary information, the budget deficit target of end-June will be met. Revenues are projected to come out above target on account of stronger GDP growth. Spending should come out below the program projection, even with some catch up relative to the under-execution of the first quarter.
- Policy measures to reinforce consolidation:
  - The fiscal consolidation strategy has been reinforced by the planned introduction of new revenue measures in 2010–11.
  - An explicit expenditure cap for the rest of 2010 has been adopted.
  - The decision was taken to postpone implementation of a referendum requirement on tax increases.
- Fiscal contribution to exchange rate pressures:
  - The increase in spending in the second quarter (which could exceed 20 percent over the first quarter) contributed to the foreign exchange market pressures observed in May.

C. Monetary Policy and Credit Conditions (summary of stated stance)
- A tightening of monetary policy in June was warranted; additional interest rate increases will likely be needed to preserve price and external stability.
- Deposit and lending rates have gradually declined over the past year, supporting a nascent recovery of credit growth; all loan growth has been in local currency.

D. Medium-Term Outlook and Exit Strategy (summary of stated projections and risks)
- Successful program execution should improve Georgia’s prospects for re-accessing private capital markets.
- The exit strategy relies on a substantial pick up of private capital inflows, FDI in particular; this reliance remains a risk factor.

*Source: IMF staff—Executive Summary (content unit: _cr10219 - Executive Summary).*

### 13.      Given the efforts already undertaken

### 13.      Given the efforts already undertaken

### Fiscal adjustment and 2010 budget actions
- Authorities initially planned to use most of the 2010 revenue gain to finance pressing capital projects while maintaining strict wage bill containment and cuts in administrative costs.
- The draft supplementary budget prepared in April allocated 85 percent of the projected revenue gain to new spending authorizations (+1.1 percent of GDP). Spending covered:
  - Replenishment of reserve funds depleted by emergency spending due to natural disasters (earthquake and flooding).
  - Housing for internally displaced persons.
  - Capital projects including new customs clearance and border checking infrastructure and initial work on relocation of the parliament to Kutaisi.
- In June, in response to exchange rate pressures and the need for faster external adjustment, the authorities cut back the proposed spending increase and introduced new revenue measures in 2010–11. The net impact on the 2010 budget is estimated at 0.5 percent of GDP:
  - 0.2 percent of GDP from scaling back the supplementary budget spending request.
  - 0.3 percent of GDP from new excises coming into effect on August 1, 2010.
- Additional revenue measures equivalent to 0.9 percent of GDP will come into effect on January 1, 2011, including harmonization of the income tax rate and expansion of the VAT base (LOI, ¶19).
- Parliament is expected to vote on these revenue measures in July 2010 as part of the new tax and customs code, which defers (no earlier than) 2013 the planned reduction of the personal income tax rate from 20 to 15 percent. The amended tax code will also remove the planned reduction of the tax on interest and dividends, which remains at 5 percent.
- The scaled-back supplementary budget spending request was submitted to parliament on June 4 and is expected to be approved by end-June.

### Fiscal outcomes, targets, and framework
- The 2010 fiscal deficit target is reduced from 7.4 percent of GDP (fifth review) to 6.3 percent, resulting in a nearly 3 points of GDP decline relative to 2009.
- Structural deficit (as reported in table): 2009: -6.2; 5th Rev.: -3.3; 6th Rev.: -3.6 (in percent of GDP).
- Overall deficit (as reported in table): 2009: -9.2; 5th Rev.: -7.4; 6th Rev.: -6.3 (in percent of GDP).
- Fiscal impulse (as reported in table): 2009: 4.0; 5th Rev.: -1.1; 6th Rev.: -1.8.
- The structural deficit is marginally higher than envisaged at the time of the fifth review because of additional spending, but the withdrawal of fiscal stimulus, as measured by the fiscal impulse, is much larger.
- Authorities will lock in the new level of spending through an explicit ceiling so that any additional revenue would be directed entirely to faster deficit reduction (LOI, ¶19).
- The proposed constitutional amendment to require a referendum for new taxes will be postponed and become effective only once the deficit has been reduced to below 3 percent of GDP (LOI, ¶18).
- No action has been taken to advance the proposed Economic Freedom, Opportunity, and Dignity Act; the draft was not yet formally presented to parliament.

### Financing, debt, and public external borrowing
- With additional long-term official budgetary support becoming available, the authorities will reduce the share of Fund financing channeled through the budget in 2010. The tranche that would become available upon completion of the sixth review would be the last one to be channeled through the budget in 2010 (LOI, ¶29).
- The overall balance of payment need covered by Fund financing in 2010 remains unchanged at US$446 million.
- External public debt-to-GDP ratio projection:
  - Peak at 43.2 percent of GDP in 2011.
  - Decline to 32.7 percent of GDP by 2015.
- Given authorities’ debt management capacity, fiscal consolidation plans, and intention to return to market financing, the indicative ceiling on nonconcessional public external borrowing no longer appears justified; it is proposed that the indicative ceiling be set on total public external borrowing.
- Government has tapped domestic market, lengthening maturity structure with one year and two year paper; T-bill rates rising constrain further domestic financing to avoid crowding out private credit.

### Fiscal adjustment composition (selected items, percent of GDP)
- Total reduction in fiscal deficit, 2009-10: 2.9 percent of GDP; 2010-14: 4.4 percent of GDP (sources: Ministry of Finance; Fund staff estimates).
- Policy adjustment and automatic stabilizers (2009-10): 2.5 percent of GDP; (2010-14): 7.1 percent of GDP.
- Increase in revenues (2009-10): 0.4 percent of GDP; (2010-14): 0.7 percent of GDP.
  - Tax revenues (2009-10): 0.8 percent of GDP; (2010-14): 1.1 percent of GDP — driven by new and higher excises, small customs tariff adjustments, reappraisal of property, improvement in revenue collection (2010), harmonization of personal income tax rates, VAT base expansion (2011).
- Decrease in expenditures (2009-10): 2.1 percent of GDP; (2010-14): 6.4 percent of GDP.
  - Current spending (2009-10): 2.2 percent of GDP; (2010-14): 3.5 percent of GDP.
    - Compensation for employees (2010-14): 0.9 percent of GDP — wage bill containment measures offset by reclassification of LEPL expenditures (2010).
    - Use of goods and services (2009-10): 1.0 percent of GDP; (2010-14): 0.5 percent of GDP — cuts in administrative expenses of 10-15% in all ministries in nominal terms (2010), and 4% cumulatively in real terms except in education, health, agriculture (2010-2014).
    - Subsidies (2009-10): 0.4 percent of GDP; (2010-14): 0.7 percent of GDP — reclassification of LEPL expenditures and cuts of 23% cumulatively in real terms (2010-2014).
    - Social expenses (2009-10): 0.2 percent of GDP; (2010-14): 0.4 percent of GDP — increase by 4% in real terms in 2010 (pensions, social assistance, health reform), efficiency gains and decrease in number of beneficiaries (2011-2014).
    - Other expenses (2009-10): 0.7 percent of GDP; (2010-14): 1.0 percent of GDP — decrease in reserve funds (2010) and cofinancing of investment projects (2010-2014), phasing out of house construction for IDPs (from 2011 on).
  - Capital spending (2009-10): -0.6 percent of GDP; (2010-14): 3.1 percent of GDP — budget supplement (2010), completion of city rehabilitation and donor-financed infrastructure, less reconstruction/renovation of public buildings (2011-2014).
  - Net lending (2009-10): 0.5 percent of GDP; (2010-14): -0.2 percent of GDP.

### Monetary policy, credit conditions, and financial sector resilience
- Monetary tightening began in June in reaction to unstable exchange rate market conditions and inflation concerns; market rates had already begun rising in anticipation.
- Central bank refinancing increased by the equivalent of 9 percent of reserve money in April-May.
- As part of corrective measures, the refinancing rate was raised from 5 to 6¼ percent on June 16.
- Considerable dedollarization occurred in the first four months of the year; faster depreciation in June did not trigger large-scale movements out of local currency deposits.
- Measures effective April 29 to enhance monetary policy effectiveness and encourage dedollarization (Box 1):
  - Reserve requirement on lari-denominated deposits raised from 5 to 10 percent; required reserve excess of 5 percent remunerated at the policy rate.
  - Reserve requirement on foreign exchange deposits maintained at 5 percent for the time being.
  - External borrowing subject to reserve requirements starting in September 2010 at the same rate as domestic foreign exchange funding.
  - New standing facility: overnight deposits remunerated at the policy rate minus 200 basis points.
  - New 7-day collateralized refinancing facility at policy rate plus 100 basis points; access limited to GEL 200 million per week; individual limits based on capital.
  - Overnight loans simplified, interest rate at policy rate plus 200 basis points.
  - Eligible collateral expanded to include lari-denominated loans of six-month or longer maturity and guarantees provided by IFIs and international commercial banks meeting criteria; foreign exchange no longer allowed as collateral.
- Monetary program built on expected continued growth in deposits and slight deceleration of credit growth in H2 2010 due to tightening and possible increase in NPLs from exchange rate depreciation.
- Projected annual growth in credit to the economy (adjusted for valuation changes) revised up from 6 to 9½ percent relative to the fifth review.
- NDA targets for September revised down; end-December ceiling raised due to higher estimated demand for currency in circulation.
- Banking system capital adequacy: 17.6 percent in May.
  - Stress test: one-time 15 percent depreciation would, within 1 year, result in a 5.3 point decline in the banking system’s capital adequacy ratio; of that, 3.8 points from higher provisioning requirements due to deterioration of the dollar loan portfolio; remainder from valuation effects.
  - Analysis assumes a 5 percent elasticity of NPLs to exchange rate change, implying an increase of NPLs from 18 percent to 27 percent of the loan portfolio. The assumed higher elasticity may be an upper bound.

### Medium-term outlook, external financing, and exit strategy
- Exit strategy from official balance of payments support is predicated on a steady increase in private capital inflows (mainly FDI), which by 2012 should enable Georgia to return to privately financed high economic growth.
- Starting in 2012, external financing needs are projected to be covered entirely by private sector inflows and regular official financing.
- FDI outlook:
  - After stalling in H1 2010, FDI projected to recover in H2 2010 to the level of the same period of 2009 and to increase moderately in 2011.
  - In pre-crisis years, privatization attracted about 2½ percent of GDP on average in 2006–07.
- Projected private capital inflows and current account deficits over the medium term have been lowered since the fifth review due to a more conservative outlook on availability of external private financing and somewhat lower import growth owing to lower FDI and more favorable terms of trade.
- Authorities have contingency measures: if significant balance of payments pressures reemerge, they would accelerate monetary tightening and deficit reduction while continuing to rely on exchange rate adjustment (LOI, ¶26).
- Medium-term fiscal framework to be adopted by government in July 2010 (structural benchmark, LOI, ¶21). Authorities committed to reducing the deficit to 2–3 percent of GDP by 2013 (LOI, ¶18).
  - Current deficit projections imply a contraction of real spending of 3 percent in 2011 relative to 2010; government spending in relation to GDP falls by another 4 percentage points by 2014.
- Authorities plan to move to a full program presentation of the budget by 2012 and intend to adopt guidelines for line ministries by end-September (structural benchmark, LOI, ¶21).

*Source: IMF country report excerpt (text provided).*

### 27.      The authorities expect to meet the large debt service peak of 2013–14 by

### _cr10219 - 27.      The authorities expect to meet the large debt service peak of 2013–14 by

### Debt service peak and market access
- Authorities expect to meet the large debt service peak of 2013–14 by accessing capital markets as soon as conditions permit.
- Georgia’s Eurobond spreads have been affected in line with those of other emerging market countries by instability in the euro zone.
- Market access has been enhanced by an upgraded rating from S&P in April 2010.
- The authorities’ mobilization of additional budgetary support and diversification of financing sources in 2010 reduces the amount of Fund financing channeled through the budget and helps smooth the government’s debt rollover hump of 2013–14.
- Steady issuance of T-Bills and the extension of maturities are cited as foundations for capital market development and benefits for local currency funding and monetary policy.

### Risks to the medium-term strategy
- FDI risk:
  - A failure of FDI to rebound would adversely affect GDP growth.
  - Because imports would also decline, the resulting external imbalance would be to a large extent self correcting.
  - The growth shortfall would widen the fiscal deficit, requiring additional adjustment to preserve debt sustainability (Box 2).
- Debt rollover:
  - The Debt Sustainability Analysis (DSA) points to low solvency risks, but relatively high rollover risks in 2013 linked to the cumulation of Fund and Eurobond repayment obligations.
- Banking sector:
  - Banking sector risks are tied to the high level of NPLs and the exposure to currency-induced credit risks.
  - Given solid capitalization, provisioning and liquidity buffers, banking sector vulnerabilities are unlikely to become a crisis trigger but could become a destabilizing factor in the event of another shock to economic activity or the exchange rate.

### Box 2 — Alternative scenario with lower FDI (summary of assumptions and outcomes)
- Assumption:
  - Stabilization of FDI at its 2010 level (6½ percent of GDP).
  - Unchanged productivity of capital.
- Macroeconomic impact:
  - Drop in overall investment would reduce real GDP growth to 3½ percent on average over the next 5 years.
  - Balance of payments gap (relative to the baseline) would be equivalent to 0.8 percent of GDP on average over 2011–15, rising to 1.5 percent of GDP by 2015.
  - Loss of international reserves of US$466 million by 2015.
- Fiscal impact:
  - Under the same fiscal policy as the baseline (same level of real expenditure and same tax-to-GDP ratio), the deficit would begin to rise again and reach 4.3 percent of GDP by 2015.
  - The primary fiscal balance would exceed the debt-stabilizing level by 0.6 percentage point of GDP.

### Selected numeric comparisons from the Alternative Medium-Term Scenarios (2011–15)
- Real GDP growth:
  - 5th Review baseline (2011-15 average): 4.8
  - low growth (2011-15 average): 3.5
  - 2015 baseline: 5.0
  - 2015 low growth: 3.5
- Investment rate (in percent of GDP):
  - 5th Review baseline (2011-15 average): 20.0
  - low growth (2011-15 average): 13.4
  - 2015 baseline: 23.0
  - 2015 low growth: 13.3
- ICOR (change in capital stock / real GDP growth):
  - 5th Review baseline (2011-15 average): 4.2
  - low growth (2011-15 average): 3.8
  - 2015 baseline: 4.6
  - 2015 low growth: 3.8
- General Government (in percent of GDP):
  - Revenues: 27.0; 28.2; 28.2; 26.8; 27.8; 27.9 (presented in source order)
  - Tax revenue: 24.3; 25.6; 25.6; 24.3; 25.6; 25.6
  - Current expenditure: 24.2; 25.1; 26.1; 23.3; 24.4; 26.2
  - Capital expenditure: 5.8; 6.1; 6.3; 5.2; 5.6; 5.9
  - Balance: -3.0; -3.0; -4.1; -1.7; -2.1; -4.3
  - Total Public Debt: 45.2; 44.8; 48.0; 40.8; 40.5; 47.2
- Investment and saving (in percent of GDP):
  - Investment 1/: 20.0; 19.0; 13.4; 23.0; 20.0; 13.3
  - Public: 5.6; 5.8; 6.0; 5.2; 5.6; 5.9
  - Private: 14.4; 13.3; 7.4; 17.8; 14.4; 7.4
  - Gross national saving: 6.8; 7.5; 3.5; 10.3; 10.4; 5.1
  - Public saving: 2.8; 3.1; 2.2; 3.5; 3.5; 1.6
  - Private saving: 4.0; 4.4; 1.3; 6.8; 6.9; 3.5
  - Saving-investment balance = current account balance: -13.2; -11.5; -9.9; -12.7; -9.6; -8.2
- External sector:
  - Exports of goods and services (percent of GDP): 34.8; 39.7; 39.8; 35.3; 40.2; 39.2
  - Exports volume, percentage change: 8.2; 8.5; 6.4; 6.6; 8.2; 3.8
  - Imports of goods and services (percent of GDP): 53.9; 56.7; 55.5; 53.3; 54.7; 52.8
  - Imports volume, percentage change: 5.9; 5.2; 2.9; 6.0; 5.1; 3.1
  - Gross international reserves (in millions of US$): 2,414; 2,175; 1,967; 2,551; 2,221; 1,755
  - Gross international reserves (in percent of total external debt): 322; 624; 322; 620
  - Foreign direct investment (percent of GDP): 11.4; 8.9; 6.5; 12.3; 9.4; 6.5
- Sources for table figures: Georgian authorities; and Fund staff estimates.

Notes:
- 1/ Investment is measured on a net basis (acquisitions minus disposals of nonfinancial assets).
- 2/ Cumulative 2010–15.

### Program adjustments, performance criteria, and waivers
- Modifications proposed to performance criteria for end-September 2010, and establishment of new performance criteria for end-September and end-December 2010:
  - NIR: floors of end-September and end-December raised (relative to the indicative target) to reflect higher projected external inflows which outweigh the impact of higher intervention.
  - NDA: end-September ceiling lowered on account of revised demand for free reserves; end-December ceiling raised (relative to the indicative target) on account of higher estimated demand for currency in circulation.
  - Budget deficit: end-September ceiling lowered in line with the revised annual deficit target reflected in the end-December ceiling (also lower than previous indicative target). Definition modified to cover the general government rather than the consolidated government.
  - Government spending (new performance criteria): ceilings set for September and December 2010, in line with the government’s supplementary budget request.
- The end-June NDA performance criterion is expected to be met; its status to be reported separately on July 7.
- Waivers requested for end-June performance criteria:
  - Waiver of nonobservance of performance criterion on NIR, justified by corrective measures described in ¶¶ 2, 9, 14 and 21. Precise status to be reported on July 7.
  - Waiver of applicability of performance criterion on the fiscal deficit, because preliminary information through May 2010 indicates the target will be met but verification data will not be available before July 27.
- Rephasing of purchases: request to combine the seventh and eight reviews due to the delay in completing the sixth review and the objective of meeting balance of payments financing needs in 2010.

### Staff appraisal and policy recommendations
- Recovery and risks:
  - Economic recovery has gained strength.
  - Recent global financial market turbulence shifted balance of risks in 2010 from domestic to external factors.
  - Orderly completion of municipal elections and resumption of credit growth should help sustain growth momentum.
- Corrective policy actions:
  - Corrective actions taken in June to ensure faster external adjustment provide adequate assurances that program objectives are on track.
  - Persistent exchange rate pressures in April-May were due to weakness in private capital inflows compounded by relatively expansionary fiscal and monetary policies in Q2.
  - Delayed exchange rate adjustment likely caused nonobservance of end-June NIR target; faster depreciation starting in June and tightening of monetary and fiscal policies should address the imbalance.
  - Exchange rate flexibility remains key to ensuring externally sustainable recovery; NIR targets constrain intervention to guard against inadequate exchange rate adjustment.
- Fiscal policy:
  - Targeted sizeable reduction in the fiscal deficit for 2010—by nearly 3 percentage points of GDP—brings medium-term consolidation target closer.
  - Stronger cyclical rebound makes the deficit considerably lower in terms of GDP than initially estimated, even with higher spending under the supplementary budget.
  - Adoption of additional revenue measures and commitment to capping spending in 2010 make fiscal policy appropriately countercyclical going forward.
  - Authorities are encouraged to create stronger buffers against downside risks by targeting an ambitious reduction in the fiscal deficit in 2011, ahead of the 2012 and 2013 election years.
- Monetary and banking policy:
  - Recent tightening of monetary policy was warranted and should continue.
  - Enhanced access to the central bank’s refinancing facilities requires prompt and flexible adjustment of policy interest rates to changing conditions, including foreign exchange market pressures or signs of accelerating monetary and credit growth.
  - Higher interest rates would encourage deposit dedollarization.
  - Balance sheet impact of recent depreciation calls for continued close monitoring of the banking sector.
  - Ongoing economic recovery should limit adverse real sector impact of rising NPLs; timely corrective actions expected given close supervision.
- Exit strategy:
  - Improvements in confidence accompanying the rebound in activity place Georgia in a good position to re-access financial markets ahead of the rollover needs of 2013–14.
  - Program now built on an assumed slower recovery of FDI; risks appear manageable within current policy framework but a failure of FDI inflows to materialize in the second half of the year would signal need for much more fundamental policy changes.
  - Authorities’ contingency plans provide assurances that a timely response to such risks can be activated.

*Source: IMF staff report content provided in the supplied document.*

### 40.      On the basis of Georgia’s performance under the SBA and the corrective actions

### _cr10219 - 40.      On the basis of Georgia’s performance under the SBA and the corrective actions taken to address the causes of the nonobservance of the end-June NIR target, staff supports the authorities’ request for completing the sixth review, modifying and establishing performance criteria, and rephasing purchases by combining the seventh and the eighth reviews as specified in the LOI (¶32 and Table 1).

### IMF staff decision / program action
- "On the basis of Georgia’s performance under the SBA and the corrective actions taken to address the causes of the nonobservance of the end-June NIR target, staff supports the authorities’ request for completing the sixth review, modifying and establishing performance criteria, and rephasing purchases by combining the seventh and the eighth reviews as specified in the LOI (¶32 and Table 1)."

### Key macroeconomic projections and indicators (selected, from Table 1)
- Nominal GDP (in million lari): 19,075 (2008 Act.), 17,949 (2009 Prel.), 19,657 (2010 Proj.), 21,465 (2011 Proj.), 23,665 (2012 Proj.), 26,091 (2013 Proj.), 28,765 (2014 Proj.), 31,714 (2015 Proj.)
- Real GDP growth: 2.3 (2008 Act.), -3.9 (2009 Prel.), 4.5 (2010 Proj.), 4.0 (2011 Proj.), 5.0 (2012 Proj.), 5.0 (2013 Proj.), 5.0 (2014 Proj.), 5.0 (2015 Proj.)
- Consumer price index, period average: 10.0 (2008 Act.), 1.7 (2009 Prel.), 4.8 (2010 Proj.), 5.3 (2011 Proj.), 5.0 (2012 Proj.), 5.0 (2013 Proj.), 5.0 (2014 Proj.), 5.0 (2015 Proj.)
- Current account balance (in millions of US$): -2,915 (2008), -1,274 (2009), -1,355 (2010), -1,437 (2011), -1,480 (2012), -1,469 (2013), -1,466 (2014), -1,430 (2015)
- Current account (percent of GDP): -22.7 (2008), -11.9 (2009), -12.6 (2010), -13.2 (2011), -12.6 (2012), -11.6 (2013), -10.7 (2014), -9.6 (2015)
- Gross international reserves (in millions of US$): 1,480 (2008), 2,110 (2009), 2,213 (2010), 2,308 (2011), 2,238 (2012), 2,064 (2013), 2,044 (2014), 2,221 (2015)
- Gross international reserves (months of next year's imports): 3.4 (2008), 4.2 (2009), 4.1 (2010), 4.1 (2011), 3.7 (2012), 3.2 (2013), 3.0 (2014), 3.1 (2015)
- Total government debt (percent of GDP): 25.0 (2008), 37.1 (2009), 46.1 (2010), 49.3 (2011), 47.1 (2012), 45.1 (2013), 42.2 (2014), 40.5 (2015)
- Foreign-currency denominated government debt (percent of GDP): 20.9 (2008), 31.5 (2009), 40.6 (2010), 43.2 (2011), 40.5 (2012), 37.0 (2013), 34.1 (2014), 32.7 (2015)

### Fiscal accounts and projections (selected, Tables 2–3)
- Revenues (in millions of lari): 5,264 (2010 Act.), 5,518 (2011 Rev.), 5,865 (2012 Proj.), 6,238 (2013 Proj.), 6,685 (2014 Proj.), 7,310 (2015 Proj.), 8,027 (2020 Proj.), 8,823 (2030 Proj.)
- Revenues (percent of GDP): 30.7 (2008), 29.3 (2009), 29.8 (2010), 29.1 (2011), 28.2 (2012), 28.0 (2013), 27.9 (2014), 27.8 (2015)
- Expenses (percent of GDP): 28.5 (2009), 27.7 (2010), 26.5 (2011), 25.5 (2012), 24.8 (2013), 24.3 (2014), 24.4 (2015)
- Operating balance (in millions of lari): -143 (2010 Act.), 114 (2011 Rev.), 424 (2012 Proj.), 542 (2013 Proj.), 654 (2014 Proj.), 835 (2015 Proj.), 1,038 (2020 Proj.), 1,099 (2030 Proj.)
- Overall balance (in millions of lari): -1,648 (2010 Act.), -1,393 (2011 Rev.), -1,241 (2012 Proj.), -1,038 (2013 Proj.), -816 (2014 Proj.), -655 (2015 Proj.), -562 (2020 Proj.), -665 (2030 Proj.)
- Total financing (in millions of lari): 1,648 (2010), 1,393 (2011), 1,241 (2012), 1,038 (2013), 816 (2014), 655 (2015), 562 (2020), 665 (2030)
- Privatization receipts (in millions of lari): 358 (2010), 230 (2011), 210 (2012), 150 (2013), 100 (2014), 50 (2015), 50 (2020), 0 (2030)

### External sector, financing, and balance of payments (selected, Tables 4, 10, 11)
- Exports of goods and services (percent of GDP): 28.7 (2008), 29.8 (2009), 35.8 (2010), 39.1 (2011), 39.4 (2012), 39.7 (2013), 39.9 (2014), 40.2 (2015)
- GNFS exports annual percentage change: 15.9 (2008), -13.3 (2009), 20.2 (2010), 10.8 (2011), 8.7 (2012), 8.9 (2013), 8.9 (2014), 8.9 (2015)
- Imports of goods and services (percent of GDP): 58.3 (2008), 49.0 (2009), 56.1 (2010), 59.0 (2011), 57.8 (2012), 56.3 (2013), 55.6 (2014), 54.7 (2015)
- Net imports of oil (in US$): 762 (2008), 555 (2009), 668 (2010), 723 (2011), 782 (2012), 839 (2013), 884 (2014), 928 (2015)
- Current account balance (in millions of US$): see Key macro indicators above
- Capital inflows / financial account (percent of GDP): 22.6 (2008), 16.0 (2009), 10.1 (2010), 13.6 (2011), 14.0 (2012), 13.1 (2013), 13.1 (2014), 12.2 (2015)
- Foreign direct investment (percent of GDP): 12.2 (2008), 7.1 (2009), 6.5 (2010), 8.2 (2011), 8.6 (2012), 9.0 (2013), 9.4 (2014), 9.4 (2015)

### Monetary sector and reserves (Tables 5–6)
- Reserve money (percent, 12-month growth): 22.6 (Mar 2008), 22.4 (Jun 2008), 25.7 (Sep 2008), -4.5 (Dec 2008), -11.5 (Mar 2009), 6.8 (Jun 2009), 18.1 (Sep 2009), 21.8 (Dec 2009), -6.3 (Mar 2010), -7.1 (Jun 2010), -0.1 (Sep 2010), 10.0 (Dec 2010)
- Broad money (M3) (in millions of lari): 4,027 (Dec 2008), 4,188 (Mar 2009), 3,966 (Jun 2009), 4,258 (Sep 2009), 3,675 (Dec 2009), 3,594 (Mar 2010), 4,092 (Jun 2010), 4,603 (Sep 2010), 4,736 (Dec 2010)
- Broad money (M3) 12-month growth (memorandum): 50.6 (2008), 28.9 (Mar 2009), 6.9 (Jun 2009), 7.0 (Sep 2009), -8.7 (Dec 2009), -14.2 (Mar 2010), 3.2 (Jun 2010), 8.1 (Sep 2010), 28.9 (Dec 2010), 38.0 (2011), 29.0 (2012), 20.0 (2013)

### Debt, Fund credit, and program access (Tables 8–9, 13–14)
- Stock of existing Fund credit (SDR, end of period): 298.8 (2008), 501.6 (2009), 632.1 (2010), 594.0 (2011), 434.1 (2012), 189.2 (2013), 47.5 (2014), 14.0 (2015), 4.2 (2020), 0.0 (2030)
- SBA prospective purchases and schedule (available purchases, Table 9 / schedule of reviews Table 9):
  - 15-Sep-08: Approve the 18-month arrangement — 161.7 (in millions of SDR; 107.6 percent of quota)
  - 15-Dec-08: Complete the first review — 42.0 (in millions of SDR; 23-Mar-09: second review — 42.0)
  - 6-Aug-09: Complete the third review — 94.6 (62.9 percent of quota)
  - 15-Nov-09: Complete the fourth review — 47.3 (31.5 percent of quota)
  - 15-Feb-10: Complete the fifth review — 97.3 (4.7 percent of quota)
  - 9-Jul-10: Complete the sixth review — 50.0 (33.3 percent of quota)
  - 15-Nov-10: Complete the seventh and eighth reviews — 100.0 (66.5 percent of quota)
  - 15-Feb-11: Complete the ninth review — 35.0 (23.3 percent of quota)
  - 15-May-11: Complete the tenth review — 35.0 (23.3 percent of quota)
  - Total available: 747.1 (497.1 percent of quota)
- Indicators from Debt Sustainability Framework (Table 13a / 14a, baseline scenario):
  - External debt (nominal percent of GDP): 44.4 (2008), 58.4 (2009), 68.8 (2010), 73.0 (2011), 69.0 (2012), 64.5 (2013), 61.2 (2014), 57.7 (2015)
  - PV of external debt (percent of GDP): 52.7 (2010), 60.2 (2011), 64.2 (2012), 61.6 (2013), 59.5 (2014), 58.3 (2015)
  - PV of PPG external debt (percent of GDP): 25.8 (2010), 32.0 (2011), 34.4 (2012), 33.1 (2013), 32.0 (2014), 31.2 (2015)
  - Debt service on external public debt (in percent of exports) and MLT external debt service: see Tables 4 and 7 for detailed time series (e.g., MLT external debt service: 590 (2008), 758 (2009), 768 (2010), 766 (2011), 719 (2012), 749 (2013), 1,020 (2014), 2,024 (2015))
  - Public sector debt (percent of GDP): 22.3 (2007), 25.0 (2008), 37.1 (2009), 46.1 (2010), 49.3 (2011), 47.1 (2012), 45.1 (2013), 42.2 (2014), 40.5 (2015)
  - PV of public sector debt (in percent of GDP): 31.4 (2010), 37.5 (2011), 40.5 (2012), 39.7 (2013), 40.1 (2014), 39.3 (2015)
  - Gross financing need (percent of GDP): 5.7 (2008), 7.1 (2009), 10.3 (2010), 7.5 (2011), 6.1 (2012), 5.7 (2013), 9.1 (2014), 3.5 (2015)

### Stress tests and sensitivity analysis (Tables 13b, 14b, Figures)
- Multiple sensitivity and bound tests are reported for PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, and debt service ratios under alternative scenarios and shocks (e.g., historical averages, less favorable borrowing terms, real GDP growth shock, export value shock, net non-debt flows shock, one-time 30 percent nominal depreciation).
- Selected results (PV of debt-to-GDP, percent):
  - Baseline: 32 (2010), 34 (2011), 33 (2012), 32 (2013), 31 (2014), 32 (2015), 24 (2020), 16 (2030)
  - Example bound test B4 (one-time 30 percent nominal depreciation in 2011): 32 (2010), 49 (2011), 46 (2012), 44 (2013), 43 (2014), 43 (2015), 31 (2020), 20 (2030)
- Debt-service and PV indicators under stress scenarios are provided in Tables 13b and 14b for policy analysis and program risk assessment.

### Program implications and operational steps
- Staff supports: completing the sixth review; modifying and establishing performance criteria; rephasing purchases by combining seventh and eighth reviews as specified in the LOI.
- The schedule of prospective reviews and purchases (Table 9) enumerates specific availability dates and purchase amounts in millions of SDR and percent of quota for reviews through 15-May-11, with total available SDR 747.1.

*Source: IMF staff report content unit _cr10219 (extracted tables and text).*

### 1. In September 2008, the International Monetary Fund (IMF) approved a Stand-By

### _cr10219 - 1. In September 2008, the International Monetary Fund (IMF) approved a Stand-By

### Program status and intent
- IMF approved a Stand-By Arrangement (SBA) for Georgia in September 2008, augmented in August 2009.
- On March 19, 2010 the IMF’s Executive Board completed the fifth review of the SBA allowing for an immediate purchase of an amount equivalent to SDR 97.3 million.
- Letter of intent describes economic policies planned for 2010 and reaffirms commitment to prior letters dated September 9, 2008; November 28, 2008; March 10, 2009; July 30, 2009; November 25, 2009; and February 25, 2010.

### Recent economic developments
- Real GDP growth in 2009: minus 3.9 percent.
- Real GDP in Q4 2009: increased by 0.4 percent (after 5 consecutive quarters of negative growth).
- Sectors with positive year-on-year growth in Q4 2009: electricity, gas and water supply; financial intermediation; health care.
- Balance of payments Q4 2009:
  - Exports of goods and services increased year-on-year by 21 percent.
  - Imports of goods and services declined by 15 percent.
  - Worker remittances increased 22.1 percent.
  - FDI inflows declined by 11.2 percent year-on-year.
  - Current account deficit in Q4 2009: 13.4 percent of GDP.
- Current account deficit in 2009: 11.9 percent of GDP (compared to 22.7 percent in the previous year).
- Inflation:
  - End-2009 inflation: 3.0 percent.
  - May 2010 inflation: 4 percent.
  - Expected inflation in 2010: around 5 percent.
- Fiscal Q1 2010:
  - Tax collection increased by 13.0 percent y-o-y in nominal terms (excluding one-off payments).
  - Expenditures in Q1 2010: GEL 1441.0 million (general government, including capital expenditures), or 1.7 percent lower than in Q1 2009.
  - Q1 fiscal deficit reached 0.5 percent of the projected annual GDP (below program target).
- NBG FX interventions and reserves:
  - Since May 25, 2009, FX interventions conducted only through foreign exchange auctions.
  - NBG FX intervention in Q1 2010: USD 124 million (which is 38% less than IMF program incorporates).
  - NBG increased intervention in April-May to USD 150 million.
  - Exchange rate (vis-à-vis the USD) depreciated by 4.6 percent in the first 9 days of June, and by 10.2 cumulatively since the beginning of the year.
- Banking sector Q1 2010:
  - Commercial banks’ net profit in Q1 2010: GEL 15.3 million.
  - Deposits: 48 percent growth in lari terms by end-May 2010 (since May 2009).
  - Credit to the economy increased by nearly 12 percent (4 percent excluding valuation effects) since the beginning of the year (as of June 11).
  - Average capital adequacy at end-March 2010: 18.3.
- NBG initiatives:
  - New portfolio management system to cover front-middle-back office and accounting functionality based on STP principles; IFRS compliant.
  - Contract signed with WallstreetSystems; system expected fully operational by the end of 2010.
- Financial sector safeguards and contingency planning:
  - Contingency Plan (CP) in place to coordinate policy responses to systemic risks.
  - Regular stress tests conducted system-wide and bank-by-bank.
  - Reorganization toward risk-based supervision underway.
  - Safeguards Assessment recommendations implemented: new Audit Committee Charter; modified Audit Committee composition (only non-executive Board members); strengthened oversight; internal audit assessments; internal audit reviewed core banking system operations; internal audit of new RTGS and reserve management systems to follow deployment.

### Macroeconomic projections and balance of payments
- Anticipated real economy increase in Q1 2010: 2 percent in annual terms.
- 2010 real GDP growth projected at 4½ percent per annum.
- 2010 current account deficit expected around 12.6 percent of GDP.
- Projected changes in 2010:
  - Exports of goods and services: increase by 20 percent.
  - Imports of goods and services: increase by 14½ percent.
  - Worker remittances: expected increase by around 10 percent for the year.
  - Conservatively projected FDI inflows: just under US$700 million in 2010 (somewhat lower than in 2009).
  - Gross reserves in 2010 expected to increase by about US$100 million.
- Fund support request:
  - Government sought Fund support to cover a balance of payments gap of around US$450 million in 2010.
- Recovery timing:
  - Recovery in private capital inflows expected to begin in the second half of 2010.
  - If FDI fails to resume over the summer, authorities stand ready to tighten monetary policy further and cut the budget deficit further, while allowing the exchange rate to adjust.

### Fiscal policy and public finance reform
- Fiscal objective: restore a sound fiscal position to support recovery and preserve external stability.
- Medium-term deficit goal: steady reductions to 2–3 percent of GDP by 2013.
- Constitutional amendment on referendum for new taxes would become effective only once the deficit is brought below the medium-term ceiling of 3 percent of GDP.
- 2010 deficit target:
  - Target to reduce the deficit to 6.3 percent of GDP in 2010 (SBA definition), below the 7.4 percent target agreed at the Fifth Review.
  - Revenue measures:
    - Increase in excises coming into effect on August 1, 2010 with an estimated yield of 0.3 percent of GDP.
    - Additional revenue measures to be adopted in July 2010 based on revision of the existing tax code.
    - Package of new revenue measures effective January 1, 2011 (harmonization of income tax rates and partial elimination of VAT exemptions) combined with 2010 excise increases expected to yield 1.2 percent of GDP annually.
  - Supplementary budget consistent with new level of spending submitted to Parliament on June 4, 2010; expected approval by end of June 2010.
  - Commitment to cap government spending for the rest of the year at the level of the supplementary budget.
- Public Finance Management Reform:
  - Ministry of Finance implementing Public Finance Management Reform Policy Vision 2009–2013.
  - Draft budget code adopted in December 2009.
  - Progress in 2009: risk assessment tax audit system functionality; streamlined tax and customs codes and sub-legislation; electronic information exchange between banks and Revenues Service; improved capital budget document forms; customs audit and movement toward risk-based customs control; full functionality of electronic treasury; inclusion of all taxes into e-filing system.
  - Public Finance Management Reform Action Plan 2010 approved and under implementation.
  - Structural benchmarks:
    - By end-July 2010: seek cabinet approval of the medium-term expenditure framework (Basic Data and Directions) including expenditure ceilings applicable to the 2011 budget.
    - By end-September 2010: seek cabinet approval of guidelines for pilot Ministries to introduce a programmatic approach to budgeting.

### Monetary policy, FX strategy, and corrective measures
- Monetary transmission:
  - Transmission channel weakened due to the crisis and excess liquidity; NBG restored reserve requirements in local currency and activated standing facilities to influence short-term interest more effectively.
- Refinancing and collateral:
  - NBG provides guaranteed access refinancing loans against collateral at interest linked to the NBG’s key policy rate.
  - Collateral base extended by international bank guarantees and long term local currency loans.
- Monetary tightening:
  - NBG raised its refinancing rate from 5 to 6.25 percent on June 16 to maintain price stability and counter exchange rate pressures.
  - Projected end-period inflation in 2010: 5 percent (projection sensitive to money multiplier, bank lending, and international commodity price developments).
- FX interventions and targets:
  - Intervention in FX market in May and June exceeded program room for intervention; NIR target of end-June likely to be missed.
  - Corrective measures: faster exchange rate depreciation, monetary tightening, fiscal measures.
  - Commitment to flexible exchange rate unchanged; reduce frequency of auctions to strengthen flexibility.
  - NBG will intervene only to smooth extreme volatility, counter speculative pressures, and if too fast and too large depreciation threatens financial stability.
  - If external developments are more favorable, authorities may raise NIR targets for future reviews to strengthen exit strategy from official balance of payments support.
- NBG expectations:
  - External gap in private sector financed by public sector inflows.
  - NBG expected more interventions in the first half of the year than in the second due to seasonal factors.
  - Intervention volumes elevated in early June to stabilize market expectations; foreign exchange market has since stabilized.

### Structural reforms, competitiveness, and statistics
- Structural reform aims:
  - Enhance competitiveness through further privatization and reductions of the state’s role in the economy.
  - Correct administrative problems faced by investors to support recovery of private capital inflows.
- Statistics and transparency:
  - Reorganized State Department of Statistics to Geostat; new Law on State Statistics strengthens independence and sustainable production of official statistics.
  - On May 17, 2010 Georgia subscribed to the IMF’s Special Data Dissemination Standard (SDDS).

### Use of external financing and program monitoring
- Government will reduce use of IMF financing for the budget based on expectation of higher than projected budget support disbursements from IFIs in 2010.
- Purchase available upon completion of the sixth review would be the last purchase used for budget support in 2010.
- Program monitoring and requests:
  - Authorities expect end-June performance criteria under the SBA to be met, except the NIR target.
  - Request a waiver for non-observance of the end-June NIR performance criterion and request completion of the Sixth Review.
  - Expect to meet the end-June performance criterion on the cash deficit of the general government but request a waiver of applicability since verification data will not be available before July 27.
  - Government will consult with the Fund on adoption of additional measures and on revisions to the policies in this letter in accordance with the Fund’s consultation policies.

*Source: Letter of intent and accompanying staff report content from the IMF Stand-By Arrangement documentation.*

### 32. We also request: (i) a modification of the end-September PCs on the fiscal deficit,

### _cr10219 - 32. We also request: (i) a modification of the end-September PCs on the fiscal deficit,

### Program adjustments, review schedule, and measurement clarifications
- Requested actions:
  - Modification of the end-September performance criteria (PCs) on the fiscal deficit, NIR and NDA according to the attached Table 1, which also establishes end-December 2010 PCs.
  - Introduction of a PC on total government expenditure for end-September and end-December 2010.
  - Rephasing of purchases by combining the seventh and the eighth reviews.
- Review schedule:
  - The seventh and eighth reviews will be based on end-September 2010 performance criteria and are scheduled for completion by end-December 2010.
  - The ninth review will be based on end-December 2010 performance criteria and is scheduled for completion by end-March 2011.
- Technical clarifications:
  - The revised Technical Memorandum of Understanding clarifies the measurement of the PC on government expenditure and of the indicative target on the contracting and guaranteeing of total government debt.
  - Structural benchmarks under the program are described in Table 2.

### Quantitative performance criteria and indicative targets (highlights from Table 1 and TMU)
- Exchange rate for program purposes:
  - GEL 1.67 = $1.
- Net international reserves (NIR) and net domestic assets (NDA):
  - Stock of NIR amounted to $879.8 million as of December 31, 2008 (at the program exchange rate).
- Numbers shown in Table 1 (selected entries as presented in the source table):
  - Ceiling on cash deficit of the general government: 333, 96, 737, 467, 1,089, 867, 1,393, 1,241.
  - Ceiling on the general government expenditures: 5,023, 7,106 (other entries shown as "...").
  - Ceiling on net domestic assets (NDA) of the NBG 1/: 418, 397, 135, 606, 553, 568, 506, 653, 714.
  - Floor on net international reserves (NIR) of the NBG 1/: 781, 793, 897, 685, 639, 733, 740, 706, 721.
  - Ceiling on accumulation of external arrears 2/: 0, 0, 0, 0, 0, 0, 0, 0.
  - Ceiling on contracting or guaranteeing of new nonconcessional external debt by the public sector 3/: 850, 226, 850, 347, 850, 850.
  - Ceiling on contracting or guaranteeing of new total external debt by the public sector 3/: 1,000, 1,000 (other entries shown as "...").
- Notes tied to the table:
  - Actual figures and quantitative targets are based on program exchange rates. (Footnote 1)
  - The continuous performance criterion for external arrears is defined in paragraph 17 of the TMU. (Footnote 2)
  - It is proposed to replace the indicative targets on nonconcessional external public debt by indicative targets on total external public debt from the end-June test date on. (Footnote 3)

### Definitions, reporting standards, and adjustors (selected TMU provisions)
- General government and public sector:
  - General government = central government, local governments, and extra-budgetary funds.
  - Public sector = general government and the National Bank of Georgia (NBG).
- Reporting frequency and timelines:
  - Treasury to provide monthly revenues within two weeks of the end of each month; monthly expenditures and arrears of central government within four weeks; daily cash balances on accounts of the general government.
  - NBG to provide balance sheet and weekly data on reserve money and net domestic assets within three working days following the end of the week.
  - Debt Unit at MOF to provide data on external project financing monthly within two weeks of the end of each month.
- Ceiling on the cash deficit of the general government (definition highlights):
  - Cash deficit measured from the financing side at current exchange rates; total financing = (i) net domestic financing from banks and nonbanks, (ii) net external financing, and (iii) privatization receipts.
  - Net domestic financing components include lending by commercial banks, NBG, and purchases of government securities by nonbanks.
  - Net external financing includes loans disbursed for budget support (including from the IMF), project financing, net change in external arrears, change in government accounts abroad, minus amortization.
  - Privatization receipts include transfers from sale of shares, non-financial assets, leases and sale of licenses with duration of 10 years and longer.
- Ceiling on general government expenditures (definition highlights):
  - Applies to total expenditures (current and capital spending as well as net lending); monitored quarterly on a cumulative basis from the beginning of the year.
- Floor on net international reserves (NIR) of the NBG (definition highlights):
  - NIR in U.S. dollars = foreign assets of the NBG minus the sum of foreign liabilities of the NBG.
  - Foreign assets include gold, gross foreign exchange reserves, SDR holdings, and reserve position in the IMF; pledged/encumbered assets are excluded.
  - Foreign liabilities include Georgia’s outstanding liabilities to the IMF, Georgia’s SDR allocation, and other liabilities of the NBG, excluding foreign exchange balances in the government’s account with the NBG.
- Adjustors to the NIR floor:
  - (a) Upward/downward by 50 percent for any excess/shortfall in balance-of-payments support loans and grants relative to projected amounts in Table 2.
  - (b) Upward/downward by 50 percent for any excess/shortfall in disbursements of project loans and project grants to the Treasury Single Account at the NBG relative to projected amounts in Table 2.
  - (c) Upward 100 percent for any shortfall in the amount of conversion for government imports relative to projected amounts in Table 2.
- Ceiling on net domestic assets (NDA) of the NBG (definition and adjustors):
  - NDA = reserve money minus NIR (as defined); ceiling = projected reserve money minus target NIR.
  - NDA adjustors mirror those for the NIR, except (c) is downward 100 percent for any shortfall in conversion for government imports.
- Ceiling on contracting or guaranteeing of new external debt by the public sector:
  - External debt defined based on residency of the creditor and per point No. 9 of the IMF's Guidelines on Performance Criteria with Respect to External Debt (as amended effective December 1, 2009).
  - Previously disbursed rescheduled external debt is excluded from “new debt” for this PC.
  - MOF to provide details of all new contracted debt and government guarantees for external borrowing quarterly within thirty days of the end of each quarter.
- Continuous performance criterion on nonaccumulation of external arrears:
  - Public sector will not accumulate any new external payment arrears on debt service obligations to official creditors.
  - Official external payment arrears = unpaid debt service by the consolidated government and the NBG beyond 30 days after the due date.
  - The performance criterion on nonaccumulation of external debt is continuous.

### Structural benchmarks (selected items from Table 2)
- Observed/implemented items (examples and dates):
  - FSA and NBG to sign and implement a memorandum of understanding to strengthen cooperation. Time frame: End-Oct-08. Type: Structural Benchmark. Status: Observed.
  - NBG to introduce revised LOLR facility. Time frame: End-Dec-08. Type: Structural Performance Criterion. Status: Observed.
  - 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). Time frame: End-Dec-08. Type: Structural Benchmark. Status: Observed.
  - NBG, FSA, and government to develop a financial stability plan. Time frame: End-Jun-09. Type: Structural Performance Criterion. Status: Observed.
  - Submission of a new budget code to the cabinet. Time frame: End-Jul-09. Type: Structural Benchmark. Status: Observed.
  - Status report on implementation of Financial Stability Plan, including bank-by-bank contingency measures. Time frame: End-Sep-09. Type: Structural Benchmark. Status: Observed.
  - Submission to parliament of the Law on Internal Audit. Time frame: End-Sep-09. Type: Structural Benchmark. Status: Observed.
  - Submission to parliament of a state budget for 2010 that: (i) is consistent with the program targets and assumptions, and an overall deficit of no more than 7.3 percent of GDP (program definition); (ii) contains a medium-term fiscal framework consistent with the program’s medium-term deficit reduction targets; and (iii) describes the medium-term policies underlying the fiscal deficit objectives through 2013. Time frame: October 1, 2009. Type: Structural Benchmark. Status: Observed.
- Items with different statuses:
  - NBG to develop and publish a liquidity management framework, including introduction of a refinancing mechanism as main instrument to provide liquidity. Time frame: End-Mar-09. Type: Structural Benchmark. Status: Not observed. Implemented with delay.
  - Appointment of remaining members to the FSA board. Time frame: End-Jun-09. Type: Structural Benchmark. Status: Not observed, became redundant with elimination of FSA board.
  - Cabinet approval of a new medium-term expenditure framework (Basic Data and Directions) that includes expenditure ceilings applicable to the 2011 budget. Time frame: July 31, 2010. Type: Structural Benchmark. (Status column blank in source.)
  - Cabinet approval of guidelines for pilot Ministries to introduce a programmatic approach to budgeting in line with IMF TA recommendations. Time frame: September 30, 2010. Type: Structural Benchmark. (Status column blank in source.)

*Attachment II. Georgia: Revised Technical Memorandum of Understanding, June 24, 2010.*

### 14.      Supporting material: Details of official arrears accumulated on interest and

### 1.      As of April 30, 2010 the European Bank for Reconstruction and Development

### 1.      As of April 30, 2010 the European Bank for Reconstruction and Development (EBRD) had signed 133 investments in Georgia with cumulative commitments totaling $1229.6 million.

### Portfolio overview
- Signed investments: 133.
- Cumulative commitments: $1229.6 million.
- Current Portfolio Stock: $898.5 million.
- EBRD’s first operation in Georgia: power rehabilitation project signed in December 1994.
- Ratio of private sector projects in the portfolio: 68.3 percent.
- Bank’s strategic focus: primarily private sector financing; selected public sector projects may be considered. Preference for non-sovereign operations; where sovereign guarantees are required, donor co-funding on a grant basis will be sought.

### Annual business volumes and major activities (2007–2010)
- 2007:
  - Signed transactions: 24.
  - Total signed: $282.4 million.
  - Syndicated loan to ProCreditBank Georgia: $8 million.
  - Equity participation increased in Republic Bank; MCFF introduced in Republic Bank and three sub-operations signed in agriculture and health sectors (total $9.35 million).
  - MCFF activity with TBC: six additional projects under MCFF in agriculture ($26 million), general industry ($1 million) and natural resources ($3 million).
  - Mortgage lines: TBC Bank ($12 million) and Republic Bank ($4m).
  - Loans for on-lending: Republic Bank ($10 million), Cartu Bank ($7 million) and Basis Bank ($6 million).
  - Energy Efficiency facility introduced in TBC Bank ($10 million) and Cartu Bank ($5 million).
- 2008:
  - Annual business volume: $302.6 million via 24 transactions.
  - Project examples:
    - $7.5 million loan to TBC Bank for development of SMEs.
    - Additional mortgage loan to Republic Bank: $20 million.
    - Equity investment in Basis Bank; equity increase and subordinated debt ($5 million) to Republic Bank.
    - Municipal/environmental infrastructure: Batumi Public transport ($3.5 million), Kobuleti water ($2.1 million), Borjomi water ($2.1 million).
    - $14 million loan to Geo Steel for construction/operation of 175 k ton capacity steel mini-mill (October 2008).
    - December 2008: EBRD and IFC provided Bank of Georgia with $200 million loan facilities (convertible subordinated, non-convertible subordinated and senior loans).
- 2009:
  - Signed projects: 15 (private sector).
  - Business volume: $116.2 million.
  - Joint funding package with IFC and FMO to TBC Bank: $161 million (EBRD contribution up to $70 million comprising $36.8 million equity stake, $18.5 million subordinated loan and $14.7 million senior loan).
  - $5 million loan to Cartu Bank for on-lending to SMEs.
  - Six projects totaling $16.1 million in agribusiness; four projects in telecoms, general industry, property & tourism and infrastructure sectors.
- 2010 (to April 30, 2010):
  - Largest investments signed:
    - Tbilisi Railway By-Pass: $132.6 million.
    - Black Sea Electricity Transmission Line (sovereign guaranteed loan): $106.1 million.
    - Poti Port investment: $10.6 million.
    - Adjara Solid Waste Landfill: $4.0 million.

### Early Transition Countries (ETC) initiative
- Georgia is part of the ‘Early Transition Countries’ (ETC) initiative launched in April 2004.
- Initiative aims: increase investments in the Bank’s seven poorest countries; focus on private sector business development and selected public sector interventions; stimulate market activity by streamlined financing, focus on smaller projects, mobilize more investment, and encourage ongoing economic reform.
- Risk posture: Bank will accept higher risk in ETC-financed projects while respecting sound banking principles.
- Result: Since launch of the ETC initiative, the Bank’s annual business volume in Georgia has increased five times.

### Portfolio composition and notable instruments
- Preference: non-sovereign operations; donor grant co-funding when sovereign guarantees needed.
- Use of MCFF (Medium Size Co-Financing Facility) across banks (Bank Republic, TBC, Bank of Georgia) for sub-loans in agriculture, industry, natural resources, renewable energy and other sectors.
- Use of mortgage lines, SME credit lines, subordinated debt, equity investments, and infrastructure project loans.
- Examples of sectoral projects in the portfolio: municipal transport, water supply, solid waste management, energy transmission, rail bypass, port development, SME/microfinance, agribusiness, property & tourism, financial sector frameworks.

### Portfolio table summary (selected figures as of April 30, 2010)
- Sub Total (project-level outstanding): 785.9 US Million; 592.7 EUR Million.
- Regional Total: 112.7 US Million; 85.0 EUR Million.
- GEORGIA TOTAL: 898.5 US Million; 677.7 EUR Million.
- Selected project outstanding amounts (US Million / EUR Million):
  - Adjara Solid Waste Project (18-Feb 2010): 4.0 / 3.0.
  - Bank Republic - MSME (12-Dec 2008): 10.0 / 7.5.
  - Bank of Georgia - convertible subordinated debt (30-Dec 2008): 26.0 / 19.6.
  - Bank of Georgia Senior Loan (30-Dec 2008): 50.0 / 37.7.
  - Geo Steel (20-Oct 2008): 14.0 / 10.6.
  - Enguri Hydro power Plant Rehabilitation project (22-Dec 1998): 20.6 / 15.6.
  - Georgia: Tbilisi Railway Bypass Project (17-Mar 2010): 135.4 / 102.1.
  - Black Sea Energy Transmission System (17-Mar 2010): 106.1 / 80.0.
  - Poti Port: Phase 1 (16-Mar 2010): 10.6 / 8.0.
  - TBC Bank (07-Apr 2009): 36.6 / 27.6.
  - TBC Bank - Senior Loan (14-Apr 2009): 14.7 / 11.1.
  - Tbilisi International Airport (17-May 2006): 20.9 / 15.8.
  - Regional instruments include: Baku-Tbilisi-Ceyhan (BTC) Pipeline: 45.1 / 34.0; Caucasus Online: 30.6 / 23.1; Lukoil Overseas : South Caucasus Gas Pipeline: 25.9 / 19.6.
- Foreign exchange reference rates noted in table footnotes:
  - EUR/USD rate at end of April 2010: 1.3258.
  - EUR/USD rate at end of period: 1.4716 (Dec 2007); 1.4058 (Dec 2008); 1.4419 (Dec 2009).

### IMF staff statement and macroeconomic context (as of July 9, 2010)
- IMF action:
  - IMF Executive Board completed the sixth review under the Stand-By Arrangement for Georgia (SBA equivalent to SDR 477.1 million initially; augmented on August 6, 2009 to SDR 747.1 million).
  - Completion allows immediate purchase of SDR 50 million (about US$74.8 million).
  - Waivers granted for nonobservance of end-June 2010 performance criterion on NBG net international reserves and waiver of applicability of end-June 2010 performance criterion on ceiling on cash deficit of consolidated government. Performance criteria for end-September 2010 were modified.
- Exchange rate and reserves:
  - Cumulative depreciation vis-à-vis the dollar since the beginning of the year: 9 percent as of July 6.
  - On June 24, the National Bank purchased $10 million dollars in the foreign exchange market to slow appreciation and has not intervened since (see staff statement line).
- Growth and inflation:
  - Real GDP growth (Q1 2010): 4.5 percent year-on-year (staff projection for 2010: 4.5 percent).
  - CPI inflation: 3.7 percent in June.
- Fiscal and budget:
  - Parliament approved a supplementary budget for 2010 consistent with program targets.
  - Authorities expect budget deficit to decline from planned 7.4 percent of GDP to 6.3 percent of GDP in 2010 (compared to 9.2 percent of GDP in 2009).
  - Government aim: bring budget deficit below 3 percent of GDP by 2013.
- Financial sector and credit:
  - Local-currency-denominated loans increased by 25 percent in the first six months of 2010.
  - NPL ratio: 17.6 percent according to NBG definition; slightly less than 8 percent according to IMF definition.
  - Capital adequacy ratio: 17.6 percent as of the end of May.
- External sector:
  - FDI in Q1 2010: US$ 76 million.
  - Current account deficit in Q1 2010 decreased by 54.2 percent compared to Q1 2009.
- Program implementation and policy adjustments:
  - End-June NDA performance criterion was met; NIR performance criterion missed as expected.
  - New nonconcessional external debt contracted or guaranteed by the public sector was within ceiling set as an indicative target.
  - Authorities responded to exchange rate pressures with faster depreciation and tightening of monetary and fiscal policies; monetary policy rate increased by 125 basis points.
  - National Bank pursued de-dollarization and measures to absorb excess liquidity (increased reserve requirements).
  - Authorities decided to channel only SDR 50 million of IMF financing through the budget out of SDR 150 million envisaged for rest of 2010.
  - Authorities postponed implementation of a referendum requirement on tax increases until budget deficit is below 3 percent of GDP.
- Structural and institutional developments:
  - On May 17, 2010, Georgia subscribed to the IMF’s Special Data Dissemination Standard (SDDS).
  - Georgia implemented recommendations in the recent update of the Safeguards Assessment Report.
  - In April 2010 S&P upgraded Georgia’s sovereign rating.

### Key takeaways and policy implications
- EBRD presence in Georgia is sizable with cumulative commitments of $1229.6 million and a current portfolio of $898.5 million as of April 30, 2010.
- The Bank has shifted toward a strong private sector orientation (68.3 percent private sector share).
- 2007–2009 activity shows active use of financial instruments (equity, subordinated debt, senior loans, mortgage lines, MCFF sub-loans) and significant support to domestic banks (TBC, Bank of Georgia, Bank Republic, Cartu, Basis).
- 2010 saw large infrastructure and energy investments (Tbilisi Railway By-Pass $132.6 million; Black Sea Energy Transmission System $106.1 million).
- Macroeconomic policy coordination between Georgian authorities and international partners (IMF, EBRD, IFC, FMO) emphasized fiscal consolidation, exchange rate flexibility, financial sector stabilization, and de-dollarization to support recovery and attract renewed private capital flows.

*Source: IMF staff report content as provided in the supplied document excerpt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr10219.pdf_