## _cr1083

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### Executive Summary — recent developments and program status
- Political context: stable ahead of May 2010 municipal elections; Tbilisi mayorship a springboard for 2013 presidential election; lingering tensions with Russia.
- Growth and activity:
  - Real GDP growth projections: -4 percent for 2009 and 2 percent for 2010.
  - Economic activity picked up in Q4 2009; weak private capital inflows and sluggish credit growth point to a slow recovery in 2010.
  - Substantial fiscal impulse in 2009 helped put a floor on the downturn.
- External sector:
  - 2009 current account deficit estimated at 12.2 percent of GDP.
  - Exports rose markedly in H2 2009; workers’ remittances rebounded; import volume growth was more moderate.
  - FDI roughly in line with projections; banking sector inflows reversed in H2 2009 as banks built net foreign asset positions.
  - Exchange rate response to mid-December pressures: 4 percent depreciation vis-à-vis the U.S. dollar through end-January and intervention; fx auctions temporarily increased at end-January; exchange rate subsequently appreciated slightly.
- Prices and inflation:
  - Inflation low at 2.7 percent at end-January.
- Fiscal performance:
  - All quantitative performance criteria met.
  - 2009 fiscal deficit: 9.2 percent of GDP (below program ceiling); 2008 deficit was 6.3 percent of GDP.
  - Government spending declined by 2 percent in real terms in 2009; defense spending contracted by 43 percent.
- Banking and financial conditions:
  - Since September, banks reduced dollar deposit and lending rates by 0.7 and 1.6 percentage points, respectively; average lending rate remains 19 percent.
  - Lari deposit and lending rates roughly unchanged.
  - Banks have solid capitalization and provisioning; recent decline in NPLs.
  - High risk weights on dollar lending contribute to high intermediation margins; exposure remains to high NPLs and currency-induced credit risk.
- Program status:
  - Program objectives and targets roughly unchanged; policy performance in line with expectations.
  - 2010 program aims to provide a viable exit strategy from official external support and return Georgia to capital markets ahead of large debt rollovers in 2013–14.

### Macroeconomic outlook and risks
- Growth:
  - Real GDP projected to grow by 2 percent in 2010; projection implies near stabilization relative to Q4 2009.
  - Downside risks: renewed domestic/regional tensions; slow easing of credit conditions.
  - Upside risks: momentum from recent positive trends and improved external demand (trading partner demand revised up by 4 percentage points relative to Fall 2009 WEO).
- External balance and financing:
  - Current account deficit projected to widen to 14 percent of GDP in 2010.
  - Private sector “BOP gap” projected to widen temporarily to over 6 percent of GDP in 2010.
  - Assumption: only a small increase in FDI relative to 2009 (government expects a stronger rebound).
  - Joint recovery in private capital inflows and narrowing of the current account deficit expected to close the gap over the medium term.

### Fiscal policy — objectives, composition, and quantitative adjustment
- 2010 fiscal targets:
  - Nominal fiscal deficit target: decline from 9.2 percent of GDP in 2009 to 7.4 percent in 2010.
  - Structural balance improvement targeted by 2.1 percent of GDP, driven by current expenditure containment while protecting social spending (Letter of Intent ¶19).
  - Fiscal consolidation based on expenditure containment in 2010 and over the medium term; may be adjusted to avoid procyclicality depending on recovery pace.
- Financing and IMF resources:
  - IMF financing channeled through the budget unchanged but front loaded in 2010 by reallocating the January 2010 purchase (drawn in January 2010), against a commitment not to use the equivalent end-2010 purchase for budgetary financing (LOI ¶20).
- Social spending (general government, percent of GDP):
  - Totals: 7.2 (2008), 8.4 (2009), 8.5 (2010).
  - Health programs: 1.2 (2008), 1.6 (2009), 1.8 (2010).
  - Pensions: 4.0 (2008), 4.8 (2009), 4.7 (2010).
  - Social assistance 1/: 1.1 (2008), 1.4 (2009), 1.3 (2010).
- Fiscal adjustment quantitative summary (percent of GDP):
  - Total reduction in fiscal deficit: 1.8 (2009-2010) and 5.0 (2010-2013).
  - (1) Policy adjustment and automatic stabilizers: 1.6 (2009-2010) and 7.5 (2010-2013).
    - Increase in revenues: -0.2 and 0.2.
    - Tax revenues 1/: 0.4 and 0.2.
    - Other revenues: -0.6 and 0.0.
    - Decrease in expenditures: 1.8 and 7.3.
    - Current spending 2/: 1.3 and 4.9.
      - Compensation for employees: -0.2 and 0.8.
      - Use of goods and services: 0.8 and 1.2.
      - Subsidies: 0.3 and 0.6.
      - Social expenses: -0.1 and 0.9.
      - Other expenses: 0.6 and 1.4.
    - Capital spending: 0.0 and 2.5.
    - Net lending: 0.5 and -0.1.
  - (2) Exogenous factors: 0.3 and -2.5.
    - Increase in revenues: 0.0 and -2.4.
    - Tax arrears clearance: -0.6 and -0.2.
    - External grants: 0.6 and -2.2.
    - Decrease in expenditures: 0.3 and -0.1.
    - Interest payments: -0.3 and -0.3.
  - Note: Figures may not add due to rounding. Sources: Ministry of Finance; and Fund staff estimates. Notes: 1/ Excluding intra-government tax arrears clearance. 2/ Excluding interest payments and intra-government tax arrears clearance. 3/ Shift to insurance system and increase in the number of beneficiaries.

### Monetary and exchange rate policy
- Exchange rate stance:
  - Authorities will not counter persistent exchange rate trends that reflect fundamental imbalances.
  - Response to mid-December pressures: 4 percent depreciation vis-à-vis the U.S. dollar through end-January plus NBG intervention; temporary increase in fx auction volume and frequency at end-January.
- Monetary conditions and targets:
  - Constraints: limited powers to stimulate credit growth in a highly dollarized context.
    - Low refinancing rate: 5 percent.
    - CD rate: 5.4 percent.
    - Short-term nature of lari resources constrains local currency lending.
  - Long-term refinancing facility under consideration: make available 3–5 year resources equivalent to about 6 percent of the current loan portfolio, at a floating rate linked to the policy rate (LOI ¶24); authorities consider expanding eligible collateral and possibly seeking IFI guarantees.
  - Dedollarization instruments under consideration: interest differential in favor of lari time deposits about 1.5 percentage points; targeted deposit insurance for long-term lari deposits; raising/remunerating reserve requirement and extending it to external borrowing (LOI ¶23 and ¶25).
  - 2010 monetary program targets:
    - 17 percent increase in broad money.
    - 8 ½ percent increase in credit to the private sector.
    - Excluding valuation effects due to January 2010 depreciation: broad money growth 15 percent; credit growth 6 percent.
  - Central bank reserves and FX operations:
    - Gross international reserves projected to increase to $2.3 billion by end-2010, $192 million higher than at the time of the fourth review.
    - NIR target for end-2010 revised up for higher official inflows but still decline relative to end-2009 level (by $281 million) to accommodate net auctions to the private sector.
    - Program allows fx auctions of $370 million in 2010; $94.2 million used through end-February.
  - Operational objectives: NDA target to sterilize part of the accumulation of bank free reserves through short-term CDs; continue CDs to keep banks’ free reserves within a range limiting sudden conversions into dollars; fx auctions to cover part of temporary private external financing gap while allowing exchange rate flexibility (LOI ¶26).

### Banking sector — supervision, risks, and resolution
- Soundness and risks:
  - Banks: solid capitalization and provisioning; recent decline in NPLs reduced some balance sheet constraints.
  - High capitalization requirements (from high risk weight on dollar lending) contribute to high intermediation margins.
  - Banks remain exposed to credit risk from high NPLs and currency-induced credit risk.
- Supervisory reforms:
  - Reorganization to improve risk assessment and integrate macroeconomic risk factors (LOI ¶6 and ¶11).
  - Implementation of risk-based supervision beginning with differentiated capital requirements based on CAMEL ratings.
  - Plans for dynamic provisioning and fx-denominated capital/provisioning on hold.
- Resolution framework:
  - Amended central bank organic law (December 2009) expands powers over banks under temporary administration, including mergers and recapitalization.
  - Draft Freedom Act would require government divestment from any bank holding within a year; staff noted this could hamper resolution strategy.
  - Plans to refine stress testing and conduct overall bank vulnerability assessment with World Bank assistance.
- Risks and monitoring:
  - Credit quality deterioration could spread to consumer credit and NPLs could rise again; currency-induced credit risk remains a concern.

### Program issues, safeguards, and monitoring
- Modifications and conditionality:
  - Staff supports completion of the fifth review and modification of program conditionality as in LOI (¶33, Tables 1 and 2).
  - Proposed change: contract/guarantee of new nonconcessional external debt adjusted from performance criterion to indicative target (reflecting moderate vulnerabilities and capacity).
- Performance criteria and reporting:
  - All end-December performance criteria met.
  - Revised Technical Memorandum of Understanding (February 25, 2010) defines NDA, NIR, ceilings, adjustors, and reporting timelines.
  - Key program exchange rate for program purposes: GEL 1.67 = $1.
  - Stock of NIR amounted to $879.8 million as of December 31, 2008 (program exchange rate).
  - Projected reserve money (end-period, million lari): 1,722.8 (Mar 31, 2010); 1,750.4 (Jun 30, 2010); 1,792.1 (Sep 30, 2010); 1,831.1 (Dec 31, 2010).
  - Projected cumulative balance-of-payments support flows (million US$): March 31, 2010 — Balance-of-payments support loans and grants: 19.2; project loans and grants: 45.9; conversion for government imports: 55.0. (Further quarterly projections provided in Table 2.)
- Safeguards:
  - 2008 safeguard assessment updated January 21, 2010.
  - Agreement between NBG and MOF clarifying disbursement roles signed; authorities intend to implement key recommendations within recommended time frame.
  - Ongoing legal discussions to integrate provisions on independence of Council Members, President, Vice-President, and Chief Internal Auditor into national bank organic law.
- Reporting of arrears:
  - Official arrears on interest and principal reported to the IMF within one week of a missed payment, using actual exchange rates.

### Staff appraisal — findings and recommendations
- Assessment: policy performance good; all quantitative criteria met; exchange rate flexibility increased; significant 2009 reforms.
- Key risks: evolution of private capital inflows critical for external sustainability; uncertain growth outlook requires readiness to adjust fiscal deficit targets to avoid procyclicality.
- Recommendations:
  - Save any revenue overperformance in event of higher-than-projected GDP growth and direct it to faster deficit reduction.
  - Promote dedollarization: dedollarization of deposits is key; consider targeted deposit insurance and consumer protection legislation.
  - Central bank should be ready to increase the refinancing rate and allow CD rate to rise as conditions stabilize to promote dedollarization and preserve disinflation gains; strengthen monetary policy framework and consider IMF technical assistance.
  - Continue reforms and capacity building in financial supervision; move toward risk-based supervision to minimize risk of replicating unsustainable pre-crisis credit growth.

### Key macro and fiscal figures (selected exact values from tables and text)
- Nominal GDP (million lari): 19,075 (2008 Act.), 17,935 (2009 Act.), 18,934 (2010 Prev. proj.), 20,675 (2011 proj.), 22,795 (2012 proj.), 25,131 (2013 proj.), 27,707 (2014 proj.), 30,547 (2015 proj.).
- Real GDP growth (percent): 2.3 (2008 Act.), -4.0 (2009 Act.), 2.0 (2010 proj.), 4.0 (2011 proj.), 5.0 (2012–2015 proj. each year for 2012–2015).
- CPI, period average: 10.0 (2008 Act.), 1.7 (2009 Act.), 4.9 (2010 proj.), 5.0 (2011–2015 proj.).
- GDP per capita (US$): 2,937 (2008), 2,448 (2009), 2,483 (2010), 2,672 (2011), 2,887 (2012), 3,120 (2013), 3,372 (2014), 3,644 (2015).
- Investment (percent of GDP): 21.5 (2008), 13.0 (2009), 15.0 (2010), 17.0 (2011), 19.0 (2012), 20.0 (2013), 21.0 (2014), 23.0 (2015).
- Gross international reserves (US$, millions): 1,480 (2008), 2,110 (2009), 2,278 (2010 proj.), 2,450 (2011 proj.), 2,460 (2012 proj.), 2,286 (2013 proj.), 2,326 (2014 proj.), 2,551 (2015 proj.).
- Reserves in months of next year's imports: 3.4 (2008), 4.3 (2009), 4.3 (2010), 4.3 (2011), 4.0 (2012), 3.5 (2013), 3.3 (2014), 3.3 (2015).
- Annual general government operations (percent of GDP):
  - Revenues: 30.7 (2008 Act.), 29.4 (2009 Act.), 29.1 (2010 proj.), 27.7 (2011 proj.), 27.0 (2012 proj.), 26.9 (2013 proj.), 26.8 (2014–2015 proj.).
  - Expenses: 28.5 (2008 Act.), 30.0 (2009 Act.), 28.5 (2010 proj.), 26.3 (2011 proj.), 24.8 (2012 proj.), 23.7 (2013 proj.), 23.1 (2014 proj.), 23.3 (2015 proj.).
  - Overall balance: -6.3 percent of GDP (-1,208 million lari) (2008 Act.), -9.6 percent of GDP (-1,726 million lari) (2009 Act.), -7.3 percent of GDP (-1,393 million lari) (2010 proj.), -5.5 percent (-1,138 million lari) (2011 proj.), -3.9 percent (-893 million lari) (2012 proj.), -2.4 percent (-596 million lari) (2013 proj.), -1.7 percent (-458 million lari) (2014 proj.), -1.7 percent (-517 million lari) (2015 proj.).
- External debt indicators:
  - External public debt (percent of GDP): 20.9 (Dec-08), 31.8 (Dec-09).
  - External debt (percent of GDP): 42.0 (Dec-08), 55.4 (Dec-09).
  - Current account balance (percent of GDP): -22.7 (2008), -12.2 (2009), -14.2 (2010 proj.), -13.9 (2011 proj.), -13.5 (2012 proj.), -13.1 (2013 proj.), -12.9 (2014 proj.), -12.7 (2015 proj.).
  - Gross financing need (percent of GDP): 7.1 (2008), 10.4 (2009), 8.4 (2010), 6.8 (2011), 6.7 (2012), 10.3 (2013), 5.0 (2014), 3.1 (2015).
- Balance of payments summary (US$, millions):
  - Current account balance: -2,915 (2008), -1,626 (2009), -1,312 (2010 proj.), -1,765 (2011 proj.), -1,544 (2012 proj.), -1,626 (2013 proj.), -1,717 (2014 proj.), -1,800 (2015 proj.).
  - Direct investment (net): 1,523 (2008), 700 (2009), 767 (2010), 817 (2011), 858 (2012), 1,170 (2013), 1,379 (2014), 1,596 (2015).
- IMF program and financing:
  - IMF Stand-By Arrangement approved September 15, 2008; augmented August 6, 2009 to SDR 747.1 million.
  - Completion of the fifth review permits immediate purchase of SDR 97.3 million (64.7 percent of quota) (Press Release No. 10/101).
  - IMF January drawing channeled through budget: SDR 47.3 million.
  - Last prospective IMF drawing of 2010 not intended for budget support: SDR 50 million.
- Selected operational and program figures:
  - Expenditure in 2009: GEL 6,851.0 million.
  - T-bill issuance in 2009: GEL 260 million; planned additional T-Bills in 2010: approximately GEL 100 million.
  - Projected FDI inflows: US$767 million (2009), US$858 million (2010).
  - Gross reserves increase in 2009: about US$630 million; expected gross reserves accumulation in 2010: about US$165 million.
  - Requested Fund support to cover balance-of-payments gap in 2010: around $500 million.
  - Q3 2009: exports decline 15.3 percent; imports decline 31.5 percent; worker remittances increase 36.6 percent.
  - Average capital adequacy end-year 2009: 19.1 percent.
  - Deposits growth by end-year 2009: 33 percent in lari terms.
  - Growth in three quarters of 2009: minus 5.5 percent.
  - Inflation: end-June 2009: 2.3 percent; end-2009: 3.0 percent; projected 2010: 5 percent.
  - Target fiscal deficit for 2010 (SBA definition): 7.4 percent of GDP; medium-term target: deficit of 2–3 percent of GDP by 2013.

### Debt sustainability, scenarios, and stress testing
- Public sector debt (percent of GDP): 27.9 (2006), 22.3 (2007), 25.0 (2008 Act.), 37.4 (2009 Act.), projected 44.7 (2010), 47.1 (2011), trending downward thereafter to 32.3 (2019 average) and 20.3 (2029 average).
- PV of public sector debt (percent of GDP): 6.0 (2006), 4.8 (2007), 19.4 (2008), 29.4 (2009), 35.7 (2010), 38.5 (2011), 37.9 (2012), 36.9 (2013), 33.8 (2014), 27.6 (2015), 18.1 (2019).
- Stress tests and scenarios include: Baseline; Historical scenario; Fix Primary Balance; Most extreme shock; Growth LT; One-time depreciation; Exports shock; Non-debt flows shock; and combinations (tables and charts present PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue under shocks).
- Sensitivity: selected tests show vulnerability to one-time depreciation and shocks to exports and non-debt flows; detailed stress-test tables provided in source.

### Relations with EBRD (selected facts)
- EBRD cumulative commitments in Georgia: $976.3 million (128 signed investments).
- Current portfolio stock as of January 31, 2010: $652.9 million.
- Private sector share of portfolio: 93.6 percent.
- Selected outstanding project amounts (US$, exact figures preserved): Bank of Georgia Senior Loan (30-Dec-08): 50.0; Bank of Georgia - convertible subordinated debt (30-Dec-08): 26.0; Bank of Georgia - subordinated debt (30-Dec-08): 24.0; TBC Bank (07-Apr-09): 38.4; TBC Bank: Subordinated Loan (14-Apr-09): 18.5; Enguri Hydro power Plant Rehabilitation project (22-Dec-98): 20.6; Geo Steel (20-Oct-08): 14.0; etc.

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

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

### Executive Summary

### Recent Economic and Political Developments

- Political context:
  - Political conditions remain stable in the run up to the May 2010 municipal elections.
  - The Tbilisi mayorship is seen as a spring board for the 2013 presidential election.
  - There are lingering tensions with Russia.

- Growth and activity:
  - Real GDP growth projections maintained at -4 percent for 2009 and 2 percent for 2010.
  - Economic activity picked up in the fourth quarter of 2009; weak private capital inflows and sluggish credit growth point to a slow recovery in 2010.
  - The substantial fiscal impulse in 2009 helped put a floor on the economic downturn.

- External sector:
  - The 2009 current account deficit is estimated at 12.2 percent of GDP, significantly below previous projections.
  - Exports rose markedly in the second half of 2009; workers’ remittances rebounded; import volume growth was more moderate.
  - FDI was roughly in line with projections; banking sector inflows reversed in the second half of 2009 as banks built up net foreign asset positions.
  - A resumption of foreign exchange rate pressures starting in mid-December was met through a mix of depreciation (4 percent vis-à-vis the U.S. dollar through end-January) and intervention.
  - In face of volatile fx market conditions at end-January, the authorities temporarily increased the volume and frequency of fx auctions; since then the exchange rate has appreciated slightly.

- Prices and inflation:
  - Inflation remains low at 2.7 percent at end-January.

- Fiscal outturns and program performance:
  - All quantitative performance criteria were met.
  - The 2009 fiscal deficit of 9.2 percent of GDP was well below the program ceiling; the increase relative to the 2008 deficit (6.3 percent of GDP) reflects a fall in revenue.
  - Government spending declined by 2 percent in real terms in 2009, led by a contraction of defense spending by 43 percent.

- Banking and financial conditions:
  - Reflecting improved liquidity conditions, deposit interest rates have declined slowly. Since September, banks have reduced dollar deposit and lending rates by 0.7 and 1.6 percentage points, respectively, but lending rates remain high—19 percent on average.
  - Lari deposit and lending rates have remained roughly unchanged.
  - Banks have solid capitalization and provisioning, and a recent decline in nonperforming loans (NPLs) has reduced some balance sheet constraints on lending.
  - High capitalization requirements (notably from high risk weight on dollar lending) contribute to high intermediation margins.
  - Banks remain exposed to substantial credit risk from high NPLs and currency-induced credit risk.

### 2010 Outlook, Program Objectives, and Targets

- Program status:
  - Given progress to date and no significant revisions to the macroeconomic outlook, program objectives and targets remain roughly unchanged.
  - The 2010 program sets out a viable exit strategy from official external support, permitting the Georgian authorities to return to capital markets ahead of large debt rollover needs in 2013–14.
  - Policy performance is in line with program expectations.

- Main program objectives:
  - Setting fiscal policy on a path of steady adjustment to preserve debt sustainability and macroeconomic stability.
  - Facilitating external adjustment by allowing the exchange rate to respond flexibly to sustained balance of payments pressures.
  - Monitoring closely banking sector risks and enhancing the efficiency of supervision.

A. Macroeconomic Outlook and Risks

- Growth and risks:
  - Real GDP is projected to grow by 2 percent in 2010, with downside and upside risks.
  - Projection implies near stabilization of economic activity relative to the level of the fourth quarter of 2009.
  - Downside risks: potential adverse impact of renewed domestic and regional tensions on confidence and investment; slow easing of credit conditions.
  - Upside risks: recent positive trends could gain momentum, sustained in part by improved external economic environment—trading partner demand has been revised up by 4 percentage points relative to the Fall 2009 WEO.

- External balance and financing:
  - Current account deficit projected to widen moderately in 2010 to 14 percent of GDP.
  - Continued weakness in private capital inflows anticipated; the private sector’s “BOP gap” is projected to widen temporarily to over 6 percent of GDP in 2010.
  - Assumptions: only a small increase in FDI relative to 2009 in line with global trends (government expects a stronger rebound).
  - Joint effects of recovery in private capital inflows and gradual narrowing of the current account deficit would close the gap over the medium term.

B. Fiscal Policy

- Fiscal targets and composition:
  - Nominal fiscal deficit target for 2010 unchanged relative to the fourth review; deficit to decline from 9.2 percent of GDP in 2009 to 7.4 percent in 2010.
  - Improvement in the structural balance by 2.1 percent of GDP, driven by current expenditure containment while protecting social spending (Letter of Intent ¶19).
  - Fiscal consolidation remains based on expenditure containment in 2010 and over the medium term.
  - Depending on the pace of the economic recovery, the fiscal deficit target may need to be adjusted later in 2010 to avoid procyclicality.

- Financing and IMF resources:
  - IMF financing channeled through the budget remains unchanged but has been front loaded in 2010 by reallocating to that purpose the purchase made after the fourth review (drawn in January 2010), against a commitment not to use the equivalent purchase at end-2010 for budgetary financing (LOI ¶20).

- Social spending and composition:
  - Social expenditures (general government) shown for 2008–10 indicate totals of 7.2, 8.4, and 8.5 percent of GDP for 2008, 2009, and 2010 respectively.
  - Breakdowns include Health programs: 1.2, 1.6, 1.8; Pensions: 4.0, 4.8, 4.7; Social assistance: 1/ 1.1, 1.4, 1.3 (percent of GDP).

- International evidence on consolidations (Box 2 highlights):
  - Expenditure-based consolidations are more durable and conducive to growth; successful adjustments rely mostly on cuts in primary current expenditures (government wages and transfers) rather than tax increases or capital spending containment.
  - Reductions in defense spending have been an important element of adjustment in advanced economies.
  - Revenue measures may help early in adjustment when revenue-to-GDP is initially low.
  - Public Financial Management reforms, fiscal rules, medium-term expenditure frameworks, and multi-year budgeting help sustain consolidation.
  - Intense consolidation efforts face “consolidation fatigue”; involvement of sub-central government is crucial; expenditure reforms involve difficult equity choices and require protection for the poor and adequate social safety nets.

C. Monetary and Exchange Rate Policy

- Exchange rate policy:
  - Authorities will not seek to counter persistent trends in the exchange rate that reflect fundamental imbalances.
  - In response to mid-December pressures, the mix of a 4 percent depreciation vis-à-vis the U.S. dollar through end-January and NBG intervention was used; fx auctions were temporarily increased in volume and frequency at end-January to stabilize the market.

- Monetary conditions and interest rates:
  - Reflecting improved liquidity, deposit rates have declined but remain high.
  - Since September, banks reduced dollar deposit and lending rates by 0.7 and 1.6 percentage points, respectively; lending rates remain high—19 percent on average.
  - Lari deposit and lending rates roughly unchanged.
  - Monetary policy has not been able to ease credit conditions substantially.

D. The Banking Sector

- Soundness indicators and risks:
  - Banks show solid capitalization and provisioning; recent decline in NPLs.
  - High capitalization requirements—stemming from high risk weights on dollar lending—contribute to high intermediation margins.
  - Banks remain exposed to credit risk from high NPLs and currency-induced credit risk.
  - Authorities are enhancing banking sector supervisory capacity and raising supervisory efficiency.

### Program Issues

- Exit strategy and market access:
  - The 2010 program provides a viable exit strategy from official external support and aims to return Georgia to capital markets ahead of large debt rollover needs in 2013–14.

- Flexibility and contingent adjustments:
  - If the economic recovery is stronger or weaker than projected, program targets (including the fiscal deficit) may be adjusted to avoid procyclicality and preserve debt sustainability.

### Staff Appraisal (summarized positions)

- Program performance is in line with expectations; all quantitative performance criteria were met.
- Continued focus on expenditure-based fiscal consolidation, flexible exchange rate policy, and strengthened banking supervision is appropriate to preserve macroeconomic stability and to facilitate a return to market financing.

*Source: Executive Summary (pages and content as provided).*

### 10.      In the event of higher-than-projected GDP growth, the mission recommended

### _cr1083 - 10.      In the event of higher-than-projected GDP growth, the mission recommended

### Fiscal policy and contingency for revenue overperformance
- Recommendation: save any revenue overperformance in the event of higher-than-projected GDP growth to facilitate meeting the authorities’ ambitious medium-term deficit target.
- Authorities' position: considered it premature to make specific provisions but indicated they would consult with staff on the use of any revenue overperformance.
- Guidance: stand ready to adjust the fiscal deficit target to avoid procyclicality; in the event of faster GDP growth, revenue overperformance should be directed to faster deficit reduction; revenue shortfalls from lower GDP growth could be accommodated in a higher deficit.

### Medium-Term Expenditure Framework and expenditure containment
- Expenditure containment is the core instrument of adjustment over the medium term.
- The Medium-Term Expenditure Framework (to be discussed in parliament in June, finalized by the government in July (structural benchmark), and then approved by parliament together with the 2011 budget in the Fall of 2010) will spell out expenditure plans and priorities in greater detail.
- Authorities remain committed to moving to programmatic budgeting by 2012 (LOI ¶22) and have requested Fund technical assistance (structural benchmark for end-September 2010).
- Proposed structural benchmark items and time frames:
  - Cabinet approval of a new medium-term expenditure framework (Basic Data and Directions) including expenditure ceilings applicable to the 2011 budget: July 31, 2010.
  - Cabinet approval of the methodology to introduce a programmatic approach to budgeting: September 30, 2010.

### Revenue administration and tax policy
- Initiatives to strengthen revenue administration:
  - Introduction of a new Tax Code merging the customs and tax codes.
  - Transformation of the revenue service into an independent entity, with power to levy its own service fees (staff was assured it would not charge for core tax administration functions).
- The plan to reduce the flat income tax rate from 20 to 15 percent remains on hold.
- Changes to the Economic Freedom, Opportunity and Dignity Act:
  - Proposed referendum requirement for tax increases simplified and rendered more flexible; to be included in a constitutional amendment that could be approved by parliament in March (LOI ¶29).
  - Increases in the top rates of the major national taxes (personal income, profit, VAT, and customs) would be subject to referendum, while excises and changes to tax base or introduction of lower tax rates would remain at government discretion.
  - Introduction of new taxes would be subject to referendum, except if they replace other taxes without raising the overall tax burden.

### Fiscal adjustment quantitative summary (2009-2013) — key figures (In percent of GDP)
- Total reduction in fiscal deficit: 1.8 (2009-2010) and 5.0 (2010-2013).
- (1) Policy adjustment and automatic stabilizers: 1.6 (2009-2010) and 7.5 (2010-2013).
  - Increase in revenues: -0.2 and 0.2.
  - Tax revenues 1/: 0.4 and 0.2.
  - Other revenues: -0.6 and 0.0.
  - Decrease in expenditures: 1.8 and 7.3.
  - Current spending 2/: 1.3 and 4.9.
    - Compensation for employees: -0.2 and 0.8.
    - Use of goods and services: 0.8 and 1.2.
    - Subsidies: 0.3 and 0.6.
    - Social expenses: -0.1 and 0.9.
    - Other expenses: 0.6 and 1.4.
  - Capital spending: 0.0 and 2.5.
  - Net lending: 0.5 and -0.1.
- (2) Exogeneous factors: 0.3 and -2.5.
  - Increase in revenues: 0.0 and -2.4.
  - Tax arrears clearance: -0.6 and -0.2.
  - External grants: 0.6 and -2.2.
  - Decrease in expenditures: 0.3 and -0.1.
  - Interest payments: -0.3 and -0.3.
- Sources: Ministry of Finance; and Fund staff estimates. Note: Figures may not add up due to rounding.
- Notes: 1/ Excluding intra-government tax arrears clearance. 2/ Excluding interest payments and intra-government tax arrears clearance. 3/ Shift to insurance system and increase in the number of beneficiaries.

### Monetary and exchange rate policy
- Acknowledged constraints: limited powers to stimulate credit growth in the highly dollarized context.
  - Low refinancing rate: 5 percent.
  - CD rate: 5.4 percent.
  - Short-term nature of lari resources constrains local currency lending.
- Long-term refinancing facility under consideration:
  - Make available to banks 3–5 year resources in an amount equivalent to about 6 percent of the current loan portfolio, at a floating rate linked to the policy rate (LOI ¶24).
  - To support the facility, authorities consider expanding eligible collateral and possibly seeking IFIs guarantees.
- Dedollarization challenges and instruments:
  - Interest differential in favor of lari time deposits: about 1.5 percentage points (currently insufficient).
  - Consideration of deposit insurance limited to long-term lari deposits (requires careful pricing to minimize moral hazard).
  - Consideration of raising and remunerating the reserve requirement and extending it to external borrowing (LOI ¶23 and 25).
- 2010 monetary program targets:
  - 17 percent increase in broad money.
  - 8 ½ percent increase in credit to the private sector.
  - Excluding valuation effects due to depreciation in January 2010: broad money growth comes to 15 percent, and credit growth to 6 percent.
- Central bank reserves and FX operations:
  - Gross international reserves projected to increase to $2.3 billion by end-2010, $192 million higher than at the time of the fourth review.
  - NIR target for end-2010 revised up on account of higher expected official inflows, but still decline relative to end-2009 level (by $281 million) to accommodate net auctions of foreign exchange to the private sector.
  - Program allows for fx auctions of $370 million in 2010, of which $94.2 million was used through end-February.
- Operational objectives:
  - NDA target set to sterilize part of the accumulation of bank free reserves through short-term CDs.
  - Continue use of CDs to keep banks’ free reserves within a range limiting the risk of sudden conversions into dollars.
  - FX auctions intended to cover part of the temporary private sector external financing gap while allowing exchange rate flexibility; authorities retain discretion on timing and amount of fx auctions and will not counter persistent trends reflecting fundamental imbalances (LOI ¶26).

### Banking sector supervision and resolution
- Supervisory enhancements:
  - Reorganization of supervisory authority to improve risk assessment capacity and integrate macroeconomic risk factors (LOI ¶6 and ¶11).
  - Implementation of risk-based supervision to begin with differentiated capital requirements based on CAMEL ratings.
  - Plans to move to dynamic provisioning and fx-denominated capital and provisioning are on hold.
- Bank resolution framework:
  - Amended central bank organic law (December 2009) expands powers over banks under temporary administration, including mergers and recapitalization.
  - Draft Freedom Act would require government divestment from any bank holding within a year; staff noted this could hamper resolution strategy.
  - Plans to refine stress testing framework and conduct an overall bank vulnerability assessment with World Bank assistance.
- Risks: credit quality deterioration could spread to consumer credit and NPLs could rise again; currency-induced credit risk remains a concern.

### Program issues and safeguards
- Proposed performance criteria on NIR, NDA, and the budget deficit for end-March and end-June 2010 revised to reflect quarterly reallocations (LOI, Table 1).
- Proposal to change performance criterion on contracting or guaranteeing nonconcessional debt to an indicative target given Georgia’s moderate debt vulnerabilities and strong management capacity.
- 2008 safeguard assessment updated: agreement between NBG and Ministry of Finance clarifying roles regarding disbursements for budgetary support was signed; authorities intend to implement key recommendations within recommended time frame.
- Ongoing discussions on integrating provisions in the national bank’s organic law regarding independence of Council Members, President, Vice-President, and Chief Internal Auditor.

### Staff appraisal — findings and recommendations
- Assessment: policy performance has been good; the 2010 program sets out a viable exit strategy. All quantitative performance criteria were met; exchange rate flexibility has increased; significant reforms implemented in 2009.
- Key risks and monitoring:
  - Evolution of private capital inflows is critical to achieving external sustainability and will be monitored closely.
  - In view of uncertain growth outlook, authorities should be ready to adjust fiscal deficit targets to avoid procyclicality.
- Recommendations:
  - Direct revenue overperformance to deficit reduction if growth is faster than projected.
  - Promote dedollarization: dedollarization of deposits is key; consider targeted deposit insurance and consumer protection legislation.
  - Central bank should stand ready to increase the refinancing rate and allow the CD rate to rise as conditions stabilize to promote dedollarization and preserve disinflation gains; strengthen monetary policy framework and consider IMF technical assistance.
  - Continue reforms and capacity building in financial supervision; move toward risk-based supervision and improved preparedness to minimize risk of replicating unsustainable pre-crisis credit growth.

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

### 33.      On the basis of Georgia’s performance under the SBA, staff supports the

### _cr1083 - 33.      On the basis of Georgia’s performance under the SBA, staff supports the

### Program decision
- Staff supports the authorities’ request for completing the fifth review, and modifying program conditionality, as specified in the LOI (¶33, and Tables 1 and 2).

### Real sector developments and outlook (Figure 1; Table 1)
- Quarterly GDP growth: series shown for 2008Q1 through 2009Q4 (est.) with quarter-on-quarter seasonally adjusted and year-on-year unadjusted series (chart).
- Indicators of activity (March 08 - December 09, 3-month moving average, y-o-y change):
  - Number of building permits: charted values (large decline in 2008, rebound in 2009).
  - VAT turnover: buoyant in late 2009 (chart).
  - Exports, Imports, Remittance inflows: picked up in the second half of 2009; imports growth more sluggish (chart).
- Table 1 selected macro indicators (2008–15):
  - Nominal GDP (in million lari): 19,075 (2008 Act.), 17,935 (2009 Act.), 18,934 (2010 Prev. proj.), 20,675 (2011 proj.), 22,795 (2012 proj.), 25,131 (2013 proj.), 27,707 (2014 proj.), 30,547 (2015 proj.).
  - Real GDP growth: 2.3 (2008 Act.), -4.0 (2009 Act.), 2.0 (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 Act.), 4.9 (2010 proj.), 5.0 (2011–2015 proj. each year).
  - GDP per capita (in US$): 2,937 (2008), 2,448 (2009), 2,483 (2010), 2,672 (2011), 2,887 (2012), 3,120 (2013), 3,372 (2014), 3,644 (2015).
  - Investment (percent of GDP): 21.5 (2008), 13.0 (2009), 15.0 (2010), 17.0 (2011), 19.0 (2012), 20.0 (2013), 21.0 (2014), 23.0 (2015).

### Exchange rate and reserve developments (Figure 2; Table 5)
- Exchange rate Lari/US$ shown Jan-08 through Dec-09 with increased volatility in 2009 (chart).
- Cumulative intervention since Jan 2008 charted (intervention in millions US$, += purchases, -= sales).
- Gross international reserves (Table 7 / Table 5):
  - Gross international reserves (in millions of US$): 1,480 (2008), 2,110 (2009), 2,278 (2010 proj.), 2,450 (2011 proj.), 2,460 (2012 proj.), 2,286 (2013 proj.), 2,326 (2014 proj.), 2,551 (2015 proj.).
  - Reserves in months of next year's imports of goods and services: 3.4 (2008), 4.3 (2009), 4.3 (2010), 4.3 (2011), 4.0 (2012), 3.5 (2013), 3.3 (2014), 3.3 (2015).
- National Bank of Georgia accounts (Table 5):
  - Reserve money (end-period, in millions of lari): 1,414 (Dec-08), 1,600 (Jun-09), 1,734 (Sep-09), 1,432 (Dec-09 Act.), projection path through 2010 shown with reserve money projection 1,831 (Dec-10 proj.).

### Fiscal sector developments and outlook (Figure 3; Tables 2, 3)
- Fiscal financing composition 2003–2015 (chart): 2008 external borrowing outstripped privatization proceeds as main source of financing.
- Overall fiscal balance projected to peak deficit in 2009 and improve thereafter through expenditure reduction; public debt increases through 2011 due to deficits (chart).
- Table 2 (Annual general government operations, 2008–15; in percent of GDP and in millions of lari):
  - Revenues (percent of GDP): 30.7 (2008 Act.), 29.4 (2009 Act.), 29.1 (2010 proj.), 27.7 (2011 proj.), 27.0 (2012 proj.), 26.9 (2013 proj.), 26.8 (2014 proj.), 26.8 (2015 proj.).
  - Expenses (percent of GDP): 28.5 (2008 Act.), 30.0 (2009 Act.), 28.5 (2010 proj.), 26.3 (2011 proj.), 24.8 (2012 proj.), 23.7 (2013 proj.), 23.1 (2014 proj.), 23.3 (2015 proj.).
  - Overall balance (in millions of lari / percent of GDP): -1,208 / -6.3 (2008 Act.), -1,726 / -9.6 (2009 Act.), -1,393 / -7.3 (2010 proj.), -1,138 / -5.5 (2011 proj.), -893 / -3.9 (2012 proj.), -596 / -2.4 (2013 proj.), -458 / -1.7 (2014 proj.), -517 / -1.7 (2015 proj.).
  - Capital spending and net lending: 1,636 (2008 Act.), 1,629 (2009 Act.), 1,506 (2010 proj.), 1,425 (2011 proj.), 1,400 (2012–2013 proj.), 1,488 (2014 proj.), 1,580 (2015 proj.) (in millions of lari and percent of GDP numbers shown).
- Table 3 (Quarterly general government operations, 2009-10) provides quarterly breakdowns (in millions of lari) and nominal GDP quarterly series used for fiscal ratios.

### Monetary and banking sector developments (Figures 4–5; Table 6)
- Monetary developments:
  - Deposits increasing since May 2009; credit has only recently stabilized (Figure 4).
  - Broad money (including fx deposits) and bank credit to private sector series shown (Table 6).
  - Credit dollarization trending upwards in 2009; deposit dollarization declined (Figure 4).
- Banking sector:
  - Nonperforming loans have started to decline recently; provisioning level remains adequate (Figure 5).
  - Regulatory capital / risk-weighted assets (NBG) and liquidity metrics recovered since end-2008 (Figure 5).
  - Profitability improving since September 2009; ROA and ROE series shown.
- Monetary survey (Table 6, selected levels in millions of lari):
  - Broad money (M3): 4,027 (Dec-08), 4,188 (Mar-09), 3,966 (Jun-09), 4,258 (Sep-09), 3,675 (Dec-09 Act.), projected increases through 2010 (5,385 Dec-10 proj.).
  - Credit to rest of economy: 5,071 (Dec-08), 5,598 (Mar-09), 5,507 (Jun-09), 6,076 (Sep-09), 5,758 (Dec-09 Act.), projected 5,712 (Dec-10 proj.).

### Debt dynamics and sustainability (Figures 6a–6b; Tables 7–14)
- External debt and stress tests (Figures 6a–6b; Table 7, Table 13a–13b):
  - External public debt (percent of GDP): 20.9 (Dec-08), 31.8 (Dec-09).
  - External debt (percent of GDP): 42.0 (Dec-08), 55.4 (Dec-09).
  - PV of debt and debt service indicators charted under baseline and alternative scenarios for 2009–2029; stress tests include one-time depreciation, exports shock, non-debt flows shock, and combinations.
- Indicators of Fund credit and access (Table 8–9):
  - Existing Fund credit (stock, in millions of SDR): 298.8 (2008), 501.6 (2009), 487.5 (2010), projections declining through 2017 with 0.0 by 2017 in projected stock.
  - Schedule of prospective reviews and purchases (Table 9): availability dates and purchase amounts (in millions of SDR) listed, including 15-Feb-10 Complete the fifth review — 97.3 (64.7 percent of quota).
- Public sector debt sustainability (Table 14a–14b):
  - Public sector debt (percent of GDP): 27.9 (2006), 22.3 (2007), 25.0 (2008 Act.), 37.4 (2009 Act.), projected 44.7 (2010), 47.1 (2011), trending downward thereafter to 32.3 (2019 average) and 20.3 (2029 average).
  - PV of public sector debt (percent of GDP): 6.0 (2006), 4.8 (2007), 19.4 (2008), 29.4 (2009), 35.7 (2010), 38.5 (2011), 37.9 (2012), 36.9 (2013), 33.8 (2014), 27.6 (2015), 18.1 (2019),  (2029)  (table provides projections through 2029).
  - Gross financing need (percent of GDP): 5.6 (2006), 5.7 (2007), 7.1 (2008), 10.4 (2009), 8.4 (2010), 6.8 (2011), 6.7 (2012), 10.3 (2013), 5.0 (2014), 3.1 (2015), 1.9 (2019).
- External vulnerability indicators (Table 7):
  - Current account balance (percent of GDP): -22.7 (2008), -12.2 (2009), projected -14.2 (2010), -13.9 (2011), -13.5 (2012), -13.1 (2013), -12.9 (2014), -12.7 (2015).
  - Debt service on external public debt (in percent of exports of goods and services): 3.4 (2008), 6.2 (2009), 5.8 (2010), 6.0 (2011), 10.1 (2012), 25.1 (2013), 11.2 (2014), 10.5 (2015).

### External financing and balance of payments (Tables 4, 10, 11, 12)
- Summary balance of payments (Table 4, in millions of US$):
  - Current account balance: -2,915 (2008), -1,626 (2009), -1,312 (2010), projected -1,765 (2011), -1,544 (2012), -1,626 (2013), -1,717 (2014), -1,800 (2015).
  - Financial account (percent of GDP): 22.6 (2008), 16.1 (2009), 11.6 (2010), projections 14.9 (2011), 15.6 (2012), 15.2 (2013), 15.5 (2014), 15.3 (2015).
  - Direct investment (net, in millions of US$): 1,523 (2008), 700 (2009), 767 (2010), projected 817 (2011), 858 (2012), 1,170 (2013), 1,379 (2014), 1,596 (2015).
- External financing requirements and sources (Table 10, in millions of US$):
  - Total requirements: -3,278 (2008), -1,830 (2009), -2,017 (2010), -2,250 (2011), -2,567 (2012), -3,576 (2013), -2,984 (2014), -3,194 (2015).
  - Total sources: 3,278 (2008), 1,830 (2009), 2,017 (2010), 2,250 (2011), 2,567 (2012), 3,576 (2013), 2,984 (2014), 3,194 (2015).
  - IMF financing line item shows SBA and ECF disbursements detailed across years (Table 10 and Table 8).
- Public external debt composition (Table 11; Table 12):
  - Public external debt total (in millions US$): 2,691 (Dec-08), 2,925 (Mar-09), 3,413 (Dec-09).
  - Multilateral share: 1,648 (Dec-08), 1,879 (Dec-09); IMF share: 465 (Dec-08), 647 (Dec-09), 791 (Dec-09 entry in table shows IMF in public external debt composition).
  - Private external debt (Table 12): total private debt 2,829 (Dec-08), 2,757 (Mar-09), 2,763 (Jun-09, Sep-09); banks and other sectors split; direct investment: intercompany lending 1,992 (Dec-08), 2,019 (Mar-09), 2,044 (Jun-09), 2,049 (Sep-09).

### Key projections and scenarios (Debt sustainability and sensitivity analyses)
- Debt sustainability analysis projects baseline and alternative scenarios through 2029 (Tables 13a–13b, 14a–14b).
- Stress tests include scenarios termed: Baseline, Historical scenario, Fix Primary Balance, Most extreme shock, Growth LT, One-time depreciation, Exports shock, Non-debt flows shock, and combinations; charts show PV of debt-to-GDP, PV of debt-to-exports, PV of debt-to-revenue, debt service-to-exports, debt service-to-revenue, debt accumulation rates, and grant-equivalent financing paths under alternatives for 2009–2029.
- Selected baseline indicators (from tables/charts):
  - PV of debt-to-GDP ratio series and PV of debt-to-exports ratio series shown under baseline and stress scenarios (Tables 13a–13b).
  - Debt service-to-exports and debt service-to-revenue ratios presented with sensitivity to one-time 30 percent nominal depreciation and other shocks (Table 13b and Table 14b).

*Source: IMF staff report text, tables, and figures as provided in the content unit.*

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

### _cr1083 - 1.      In September 2008, the International Monetary Fund (IMF) approved a Stand-By

### Recent Economic Developments
- IMF actions and program status:
  - IMF approved a Stand-By Arrangement (SBA) for Georgia in September 2008, augmented in August 2009.
  - On December 11, 2009 the IMF’s Executive Board completed the fourth review of the SBA allowing for an immediate purchase of an amount equivalent to SDR 47.3 million.
- Output and sectoral performance:
  - Growth in the three quarters of 2009 amounted to minus 5.5 percent, with signs of improvement in the third quarter.
  - Positive year-on-year growth in Q3 2009 in construction, transport, and financial intermediation.
  - The 7.8 percent contraction of real GDP in the first half of 2009 decreased in the third quarter to 1.2 percent, pointing to approximately 4.0 percent real GDP contraction in 2009.
- Inflation and monetary framework:
  - Inflation as of end-June 2009 was 2.3 percent; end-2009 inflation was 3.0 percent.
  - Authorities expect inflation to reach 5 percent in 2010 and project end-period inflation to be 5 percent in 2010.
  - New Organic Law of Georgia “On the National Bank of Georgia” came into force on December 1, 2009; Financial Supervision Agency (FSA) merged with the NBG.
  - NBG given responsibility for maintaining price stability over the medium term; allows introduction of a soft inflation targeting regime.
- Exchange rate and foreign exchange operations:
  - Since May 25, 2009, NBG foreign exchange interventions conducted only through foreign exchange auctions.
  - In October 2009, NBG expanded deviation band for auction bids from 0.5 percent to 1 percent of the official exchange rate.
  - NBG’s net FX sales totaled USD 13 million in the last two months of 2009 with no sales in December; resumed interventions in January to counter seasonal pressures.
  - Government remains fully committed to a flexible exchange rate policy; NBG does not target any exchange rate and will intervene only to smooth extreme volatility or counter speculative pressures.
- External sector and reserves:
  - Q3 2009 exports and imports of goods and services declined year-on-year by 15.3 percent and 31.5 percent, respectively.
  - Worker remittances increased 36.6 percent in Q3 2009.
  - FDI inflows grew by 69.4 percent year-on-year in Q3 2009.
  - Current account deficit dropped to 8.4 percent of GDP in Q3 2009 (improvement of 11.8 percentage points from Q3 2008 when it was 20.2 percent).
  - Overall, gross reserves increased in 2009 by about US$630 million.
- Fiscal outcomes and public finances:
  - Tax collection in 2009 declined by 7.7 percent in nominal terms.
  - Expenditures in 2009 were GEL 6851.0 million (general government, including capital expenditures), or 1.4 percent lower than in 2008.
  - Preliminary estimate of fiscal deficit reached 9.2 percent of the projected annual GDP, in line with program projections.
  - Ministry of Finance broadly on track implementing the Public Finance Management Reform Policy Vision 2009-2013; Reform Action Plan for 2009 successfully implemented.
  - New budget code adopted in December 2009.
- Financial sector developments:
  - Commercial banks’ net profit in Q4 2009 equaled GEL 17 million.
  - Deposits posted 33 percent growth in lari terms by end-year 2009.
  - Average capital adequacy at end-year 2009 equaled 19.1 percent.
  - NBG implementing a new portfolio management system (WallstreetSystems); expected fully operational by the end of 2010.
  - Contingency Plan (CP) refined, updated to include exit strategy principles; regular bank stress tests continue.
- Tax, customs, and administrative reforms:
  - 2009 progress on risk assessment tax audit system functionality, streamlining tax and customs codes, establishing electronic information exchange between banks and the Revenues Service, improving capital budget document forms, establishing customs audit, progressing towards risk-based customs control, improving electronic treasury and e-filing inclusion.

### Macroeconomic Policies for 2010
- Growth and inflation projections:
  - Anticipate economic recovery with real GDP growth projected at 2 percent in 2010.
  - Target inflation rate of 5 percent per annum in 2010.
- External sector projections for 2009 and 2010:
  - Current account deficit for 2009 expected to moderate to around 12 percent of GDP from nearly 23 percent in 2008.
  - Exports and imports of goods and services in 2009 projected to decline by 16 percent and 30 percent, respectively.
  - Worker remittances in 2009 expected to increase by around 2 percent.
  - Projected FDI inflows for 2009 of around US$767 million (51 percent lower than in 2008).
  - Current account deficit for 2010 expected to stand at 14.2 percent of GDP (2 percentage points higher than in 2009).
  - Exports and imports of goods and services projected to increase in 2010 by 13.3 percent and 12.4 percent, respectively.
  - Worker remittances in 2010 expected to increase by around 3 percent.
  - Projected FDI inflows for 2010 of around US$858 million (12 percent higher than in 2009).
  - Expect accumulation of gross reserves in 2010 of about US$165 million.
- Balance of payments support and reserves buffer:
  - Expect recovery in private capital inflows in 2010–11.
  - Authorities sought Fund support to cover a balance of payments gap of around $500 million in 2010.
- Fiscal stance and deficit reduction strategy:
  - Fiscal stance for 2010 to sustain demand in a fiscally-prudent manner, with significant continuing contribution from donor-financed spending.
  - Target to reduce the deficit to 7.4 percent of GDP in 2010 (SBA definition).
  - 2010 budget envisages sustainment of social expenditures as a share of GDP while tapping donor funding for the bulk of infrastructure spending.
  - Committed to steady reductions in the deficit to 2–3 percent of GDP by 2013.
  - Recognize external debt repayment obligations falling due in 2013–14.
- Domestic debt instruments and market development:
  - Domestic treasury bills (T-bills) introduced in Q3 2009; issuance in 2009 amounted to GEL 260 million.
  - Treasury Bills issued in 2009 will be entirely rolled over in 2010 and, depending on interest rates and other market conditions, approximately GEL 100 million of T-Bills will be issued in addition.
  - Ministry of Finance plans to introduce 2-year Treasury Notes in 2010.
  - Having channeled the January IMF drawing (SDR 47.3 million) through the budget, authorities do not intend to use the last prospective IMF drawing of 2010 (SDR 50 million) for budget support purposes.
  - Expect to mobilize additional budgetary support in 2010 and reduce Government’s use of IMF resources for deficit financing as such commitments are finalized.
- Monetary policy and financial stability measures:
  - Monetary policy transmission channel weakened; NBG considers increasing reserve requirements to become binding, remuneration of Lari required reserves, activation of standing facilities (Overnight loan and deposits).
  - NBG will increase issuance of CDs with attention not to increase interest rates to a contractionary stance.
  - NBG intends to provide commercial banks with long-term credit lines against collateral at interest linked to the NBG’s key policy rate to increase lending in local currency and lower market interest rates.
  - As market conditions allow, NBG will consider extending reserve requirements to external loans to restore monetary policy transmission and promote dedollarization.
- Structural reforms and competitiveness:
  - Additional structural reforms prioritized: further privatization and reductions of the state’s role in the economy.
  - Improvements to official statistics: reorganization of State Department of Statistics (new title—Geostat); New Law on State Statistics strengthens independence.
  - Intend to become a subscriber of the IMF’s Special Data Dissemination Standard (SDDS) in H1 of 2010.
  - Constitutional amendment initiated to require introduction of new state taxes or increases of top tax rates (except excise tax and alternative/substitute taxes) to be allowed exclusively by way of referendum initiated solely by the President of Georgia.
  - Legal amendments under discussion to achieve cost-efficiency and effectiveness gains within the Revenue Service of the Ministry of Finance.
- Safeguards and internal controls:
  - Commit to implementing recommendations in the recent update of the Safeguards Assessment Report according to deadlines, including strengthening oversight function of the audit committee.
  - After new RTGS, Reserve Management and Banking systems become operational, internal audit of the systems will be conducted.

### Program Monitoring and Performance Criteria
- Performance and reviews:
  - All end-December performance criteria under the SBA were met.
  - Request completion of the Fifth Review.
  - Sixth review will be based on end-March 2010 performance criteria and scheduled for completion by end-June 2010.
  - Seventh review based on end-June 2010 performance criteria scheduled for completion by end-September 2010.
  - Eighth review based on end-September 2010 performance criteria scheduled for completion by end-December 2010.
- Modifications and targets:
  - Request modification of the end-March and end-June PCs on the fiscal deficit, NIR and NDA according to attached Table 1, which also establishes end-September 2010 PCs and indicative targets for December 2010.
  - Revised Technical Memorandum of Understanding clarifies the measurement of NDA.
- Specific quantitative figures reported (selected exact values as reported in text and tables):
  - Expenditure in 2009: GEL 6851.0 million.
  - Preliminary fiscal deficit: 9.2 percent of the projected annual GDP.
  - T-bill issuance in 2009: GEL 260 million.
  - Additional T-Bills planned in 2010: approximately GEL 100 million.
  - IMF January drawing channeled through budget: SDR 47.3 million.
  - Last prospective IMF drawing of 2010 not intended for budget support: SDR 50 million.
  - Projected FDI inflows 2009: US$767 million.
  - Projected FDI inflows 2010: US$858 million.
  - Gross reserves increase in 2009: about US$630 million.
  - Expected gross reserves accumulation in 2010: about US$165 million.
  - Requested Fund support to cover balance of payments gap in 2010: around $500 million.
  - Q3 2009 exports decline: 15.3 percent; imports decline: 31.5 percent.
  - Q3 2009 worker remittances increase: 36.6 percent.
  - Average capital adequacy end-year 2009: 19.1 percent.
  - Deposits growth by end-year 2009: 33 percent in lari terms.
  - Growth in three quarters of 2009: minus 5.5 percent.
  - Real GDP growth projection for 2010: 2 percent.
  - Inflation as of end-June 2009: 2.3 percent; end-2009: 3.0 percent; projected 2010: 5 percent.
  - Target fiscal deficit for 2010 (SBA definition): 7.4 percent of GDP.
  - Medium-term fiscal target: deficit of 2–3 percent of GDP by 2013.
- Structural benchmarks (selected items and status from Table 2):
  - FSA and NBG to sign and implement a memorandum of understanding to strengthen cooperation — End-Oct-08 — Structural Benchmark — Observed.
  - NBG to introduce revised LOLR facility — End-Dec-08 — Structural Performance Criterion — Observed.
  - Submission to parliament of a state budget for 2009 with an overall fiscal deficit of no more than 3¾ percent of projected GDP — End-Dec-08 — Structural Benchmark — Observed.
  - NBG to develop and publish a liquidity management framework, including introduction of a refinancing mechanism — End-Mar-09 — Structural Benchmark — Not observed. Implemented with delay.
  - NBG, FSA, and government to develop a financial stability plan defining roles and responsibilities — End-Jun-09 — Structural Performance Criterion — Observed.
  - Appointment of remaining members to the FSA board — End-Jun-09 — Structural Benchmark — Not observed, became redundant with elimination of FSA board.
  - Submission of a new budget code to the cabinet — End-Jul-09 — Structural Benchmark — Observed.
  - Status report on implementation of the Financial Stability Plan action plan incl. bank-by-bank contingency measures — End-Sep-09 — Structural Benchmark — Observed.
  - Submission to parliament of the Law on Internal Audit — End-Sep-09 — Structural Benchmark — Observed.
  - Submission to parliament of a state budget for 2010 consistent with program targets and an overall deficit no more than (table continues in source).
- Authorizations:
  - Authorities authorize the IMF to publish the Letter of Intent and its attachments as well as the accompanying staff report.

*Letter of Intent and attachments signed by Nika Gilauri (Prime Minister of Georgia); Kakha Baindurashvili (Minister of Finance); Giorgi Kadagidze (President of the National Bank of Georgia).*

### 7.3 percent of GDP (program definition); (ii) contains

### _cr1083 - 7.3 percent of GDP (program definition); (ii) contains

### Medium-term fiscal framework and structural benchmarks
- Program requires a medium-term fiscal framework consistent with the program’s medium-term deficit reduction targets and describing medium-term policies underlying the fiscal deficit objectives through 2013.
- Structural benchmarks and dates reported:
  - October 1, 2009 — Structural Benchmark — Observed.
  - Cabinet approval of a new medium-term expenditure framework (Basic Data and Directions) that includes expenditure ceilings applicable to the 2011 budget — July 31, 2010 — Structural Benchmark.
  - Cabinet approval of the methodology to introduce a programmatic approach to budgeting, identifying the requirements in terms of budget preparation processes and information needs — September 30, 2010 — Structural Benchmark.

### Scope and reporting arrangements (Revised Technical Memorandum of Understanding, February 25, 2010)
- Purpose: Defines quantitative performance criteria, indicative targets, and reporting requirements for the Stand-By Arrangement (SBA); replaces the technical memorandum dated November 25, 2009.
- Exchange rate for program purposes: GEL 1.67 = $1. The corresponding cross exchange rates are provided in Table 1 (reported in program tables).
- Consolidated government defined as: central government, local governments, extrabudgetary funds, and LEPLs that provide general government services; extrabudgetary funds established by government will be consolidated.
- Public sector defined as: consolidated government and the National Bank of Georgia (NBG).
- Reporting: Treasury Department of the Ministry of Finance (MOF) to provide monthly detailed information on revenues, expenditures, arrears, and cash balances.

### I. Ceiling on the Cash Deficit of the Consolidated Government
- Definition: Cash deficit measured from the financing side at current exchange rates and equal to total financing.
- Total financing components:
  - (i) Net domestic financing from banks and nonbanks, including:
    - Net lending (borrowing net of repayments) provided by commercial banks to the consolidated government plus the use of deposits held by the consolidated government at commercial banks; monitored using NBG’s monetary survey and Treasury data.
    - Change in cash balances of local government at commercial banks for budget financing monitored via “budget of territorial unit” account data from the Treasury Department.
    - Securities issued by the consolidated government and purchased by commercial banks (for example, T-Bills) included.
    - Net lending (borrowing net of repayments) provided by the NBG to the consolidated government plus the use of deposits of the consolidated government held at the NBG; monitored via Central Bank survey and Treasury data; change in central government cash balances at the NBG monitored via “GEL TSA state budget” account data.
    - Securities issued and purchased by the NBG (for example, T-Bills) included.
    - Securities issued and purchased by nonbanks (for example, T-Bills or securitized claims sold by the NBG) included.
  - (ii) Net external financing: total of loans disbursed for budget support (including from the IMF), project financing (capital expenditure and net lending), net change in external arrears, change in consolidated government accounts abroad, minus amortization. Amortization includes all external debt-related principal payments by the consolidated government.
  - (iii) Privatization receipts: all transfers of monies received by central and local governments from sale of assets, including sale of shares, sale of non-financial assets, leases and sale of licenses with duration of 10 years and longer.
- Supporting material and reporting timelines:
  - Domestic bank and nonbank financing: provided by NBG and Treasury within four weeks after month end.
  - External project financing and other external borrowing: provided by Debt Unit at MOF monthly within two weeks of month end (specifying projects by creditor).
  - Data provided at actual exchange rates.
  - Privatization receipts: provided by Treasury to IMF monthly within two weeks of month end; consistent with NBG revenue account(s).
  - Data on securitized debt sold by NBG (including securities purchased by nonbanks): reported monthly by NBG within two weeks of month end.

### II. Floor on the Net International Reserves (NIR) of the NBG
- Definition: NIR in U.S. dollars = foreign assets of NBG minus foreign liabilities of NBG.
  - Foreign assets include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and the reserve position in the IMF.
  - Gross foreign exchange reserves defined as liquid, convertible currency claims on nonresidents, including cash holdings readily available.
  - Pledged or encumbered assets (including assets used as collateral or guarantee for third party external liabilities) excluded from foreign assets.
  - Foreign liabilities defined as sum of Georgia’s outstanding liabilities to the IMF, Georgia’s SDR allocation, and any other liabilities of the NBG, excluding foreign exchange balances in the government’s account with the NBG.
  - Definition excludes foreign assets from foreign currency deposits of financial institutions at the NBG and foreign assets arising from currency swaps with financial institutions.
  - For monitoring, stocks valued at program exchange rates as described.
- Key statistic: The stock of NIR amounted to $879.8 million as of December 31, 2008 (at the program exchange rate).
- Adjustors to the NIR floor:
  - (a) upward/downward by 50 percent for any excess/shortfall in balance-of-payments support loans and balance-of-payments support 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.
- Reporting: NBG foreign exchange flows table (details of inflows, outflows, and NIR) provided weekly within three working days following week end, including both actual and program exchange rate reporting of NIR and related items (net foreign financing, conversions for government imports, transfers from Sovereign Wealth Funds).

### III. Ceiling on Net Domestic Assets (NDA) of the NBG
- Definition: NDA = reserve money minus NIR (as defined above). Ceiling on NDA = projected reserve money (as defined in Table 3) minus target NIR.
- Adjustors to the NDA ceiling:
  - (a) upward/downward by 50 percent for any shortfall/excess in balance-of-payments support loans and balance-of-payments support grants relative to projected amounts in Table 2.
  - (b) upward/downward by 50 percent for any shortfall/excess in disbursements of project loans and project grants to the Treasury Single account at the NBG relative to projected amounts in Table 2.
  - (c) downward 100 percent for any shortfall in the amount of conversion for government imports relative to projected amounts in Table 2.
- Reporting: NBG to provide monthly balance sheet including data on net domestic assets within two weeks of month end; data reported using both actual and program exchange rates.

### IV. Ceiling on Contracting or Guaranteeing of New Nonconcessional External Debt by the Public Sector
- Definition: Nonconcessional external loans = loans from lenders other than the IMF with a grant element of less than 35 percent of the value of the loan.
- Grant element calculation:
  - Use currency-specific discount rates reported by the OECD (CIRRs).
  - For maturities less than 15 years, use six-month averages of commercial interest rates.
  - For maturities longer than 15 years, use 10-year averages.
- Scope: Applies to debt as defined in point No. 9 of the IMF's Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements (Decision No. 12274, revised August 31, 2009 (Decision No. 14416-(09/91)), and to commitments contracted or guaranteed for which value has not been received.
- Exclusion: Previously contracted nonconcessional external debt that has been rescheduled is excluded from “new debt”.
- Supporting material: MOF to provide details of all new commitments and government guarantees for external borrowing with explanations monthly within two weeks of month end; data at actual exchange rates.

### V. Continuous Performance Criterion on Nonaccumulation of External Arrears
- Definition: During the arrangement period, the consolidated government and the NBG will not accumulate any new external payment arrears on debt service obligations to official creditors.
- Official external payment arrears defined as unpaid debt service by the consolidated government and the NBG beyond 30 days after the due date.
- This performance criterion is continuous.

*Source: Attachment II. GEORGIA: REVISED TECHNICAL MEMORANDUM OF UNDERSTANDING, February 25, 2010.*

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

### _cr1083 - 16.      Supporting material: Details of official arrears accumulated on interest and

### Reporting requirement for official arrears
- Official arrears accumulated on interest and principal payments to creditors will be reported to the IMF within one week from the date of the missed payment.
- Data will be provided using actual exchange rates.

### Program exchange rates (Table 1)
- SDR Special Drawing Rights: 0.65 Currency/US$
- GEL Georgian lari: 1.67 Currency/US$
- EUR Euro: 0.72 Currency/US$

### Projected Balance-of-Payments Support Financing (Table 2)
- Units: In million U.S. dollars
- Note: "1/ Cumulative from the beginning of the calendar year."

Projected cumulative flows by category and date:
- March 31, 2010
  - Balance-of-payments support loans and balance-of-payments support grants: 19.2
  - Project loans and project grants: 45.9
  - Conversion for government imports: 55.0
- June 30, 2010
  - Balance-of-payments support loans and balance-of-payments support grants: 19.2
  - Project loans and project grants: 117.4
  - Conversion for government imports: 115.0
- September 30, 2010
  - Balance-of-payments support loans and balance-of-payments support grants: 115.5
  - Project loans and project grants: 198.8
  - Conversion for government imports: 180.0
- December 31, 2010
  - Balance-of-payments support loans and balance-of-payments support grants: 161.0
  - Project loans and project grants: 218.8
  - Conversion for government imports: 250.0

### Projected Reserve Money (Table 3)
- Units: End of period stock in million lari
- March 31, 2010: 1,722.8
- June 30, 2010: 1,750.4
- September 30, 2010: 1,792.1
- December 31, 2010: 1,831.1

### Informational Annex — Key IMF/GEO institutional and financial data (selected items)
- Document title context: INTERNATIONAL MONETARY FUND — GEORGIA — Fifth Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria — Informational Annex — Prepared by the Middle East and Central Asia Department — March 2, 2010.
- I. Membership Status: Georgia joined the Fund on May 5, 1992.
- II. General Resources Account (SDR Million Percent of Quota)
  - Quota: 150.30 (100.00)
  - Fund holdings of currency: 580.10 (385.96)
  - Reserve position in Fund: 0.01 (0.01)
- III. SDR Department (SDR Million Percent of Allocation)
  - Holdings: 145.22 (100.88)
- IV. Outstanding Purchases and Loans (SDR Million Percent of Quota)
  - Stand-by Arrangements: 429.80 (285.96)
  - ECF: 115.95 (77.15)
- V. Latest Financial Arrangements (Approval Date / Expiration Date / Amount Approved / Amount Drawn)
  - Stand-By: 9/15/08 — 6/14/11 — 747.10 (SDR million) — 429.80 (SDR million)
  - ECF: 6/4/04 — 9/30/07 — 98.00 (SDR million) — 98.00 (SDR million)
  - ECF: 1/12/01 — 1/11/04 — 108.00 (SDR million) — 49.50 (SDR million)
- VI. Projected Payments to Fund (Expectation Basis) (SDR million; based on existing use of resources and present holdings of SDRs)
  - Forthcoming Principal, Charges/interest, Total by year (format as in source)
    - 2010
      - Principal: 10.95 38.11 159.90 208.38 93.10  (note: original layout retains line breaks/format)
      - Charges/interest: 5.18 5.30 4.94 2.89 0.77
      - Total: 16.13 43.41 64.84 211.27 93.87
  - Footnote: "Following the Low Income Countries (LIC) reforms, effective January 7, 2010, the PRGF arrangements were renamed the Extended Credit Facility (ECF) Arrangements."

### Exchange arrangements (selected points)
- Since April 29, 1993, the Tbilisi Interbank Currency Exchange (TICEX) has conducted periodic auctions to determine the exchange rate of the domestic currency vis-à-vis the U.S. dollar; auctions are conducted daily.
- A temporary de facto exchange rate peg to the U.S. dollar was introduced after the early August armed conflict; in the second week of November, the authorities allowed a 17 percent depreciation of the lari.
- In March 2009, authorities introduced an auction-based system for the foreign exchange market.
- In end-May 2009, authorities officially ended foreign exchange market interventions on TICEX.
- The government uses the official exchange rate for budget and tax accounting purposes and for all payments between the government and enterprises and other legal entities.
- The official rate may differ by more than two percent from freely determined market rates, creating a multiple currency practice.

### Safeguards and audits (selected)
- An update of the December 2008 safeguards assessment of the National Bank of Georgia (NBG) was completed on January 21, 2010.
- NBG continues to publish financial statements that comply with International Financial Reporting Standards and are externally audited by an international firm in accordance with International Standards on Auditing.
- Authorities agreed to a multi-year appointment of an external audit firm beginning with financial year 2010.
- Audit Committee arrangements require further strengthening, including restricting membership to non-executive directors.

*International Monetary Fund. Georgia. Fifth Review Under the Stand-By Arrangement and Request for Modification of Performance Criteria. Informational Annex. Prepared by the Middle East and Central Asia Department. March 2, 2010.*

### ANNEX III. GEORGIA: RELATIONS WITH THE EBRD

### ANNEX III. GEORGIA: RELATIONS WITH THE EBRD (As of January 31, 2010)

### Overview
- The European Bank for Reconstruction and Development (EBRD) had signed 128 investments in Georgia with cumulative commitments totaling $976.3 million.
- Current Portfolio Stock equals $652.9 million.
- The EBRD’s first operation in Georgia was a power rehabilitation project signed in December 1994.

### 2007: Business and Key Transactions
- Annual signed transactions: 24.
- Total signed in 2007: $282.4 million.
- Notable operations and amounts:
  - Syndicated loan to ProCreditBank Georgia: $8 million.
  - Increased equity participation in Republic Bank; introduced MCFF in Republic Bank with three sub-operations in agriculture and health sectors (total $9.35 million).
  - MCFF with TBC Bank: six 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 ($4 million).
  - On-lending loans: Republic Bank ($10 million), Cartu Bank ($7 million), Basis Bank ($6 million) to MSMEs.
  - Energy Efficiency facility introduced in TBC Bank ($10 million) and Cartu Bank ($5 million).

### 2008: Business and Key Transactions
- Annual business volume: $302.6 million through 24 transactions.
- Notable operations and amounts:
  - $7.5 million loan to TBC Bank for 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 and environmental infrastructure projects: Batumi Public Transport ($3.5 million), Kobuleti ($2.1 million) and Borjomi water supply ($2.1 million).
  - $14 million loan to Geo Steel for construction and operation of 175 k ton capacity steel mini-mill.
  - December 2008: EBRD and IFC provided Bank of Georgia with $200 million loan facilities comprising convertible subordinated, non-convertible subordinated and senior loans to support Bank of Georgia post-war.

### 2009: Business and Key Transactions
- Signed projects in private sector: 15.
- Business volume in 2009: $116.2 million.
- Crisis response package for TBC Bank (EBRD, IFC, FMO): $161 million in loans and equity investment; EBRD contribution up to $70 million including:
  - Equity stake acquisition: $36.8 million.
  - Subordinated loan: $18.5 million.
  - Senior loan: $14.7 million.
- Additional transactions:
  - $5 million loan to Cartu Bank for SME on-lending.
  - Six agribusiness projects totaling $16.1 million.
  - Four projects in telecoms, general industry, property and tourism, and infrastructure sectors.

### Portfolio Composition and Strategic Orientation
- Private sector share of portfolio: 93.6 percent.
- EBRD focus: primarily on private sector financing; may consider selected public sector projects.
- Preference: non-sovereign operations; where sovereign guarantees required, donor co-funding on a grant basis will be sought.
- The EBRD accepts higher risk in Early Transition Countries while respecting sound banking principles.

### Early Transition Countries (ETC) Initiative Impact
- Georgia is part of the ETC initiative launched in April 2004 to increase investments in seven poorest countries.
- Objectives: stimulate private sector business development and selected public sector interventions, focus on smaller projects, mobilize more investment, and encourage economic reform.
- Since launch of the ETC initiative, the Bank’s annual business volume in Georgia has been increased five times.

### Key Portfolio Totals and Selected Outstanding Amounts (As of January 31, 2010)
- Total outstanding (GEORGIA projects list subtotal): $539.8 million.
- Total regional outstanding: $113.1 million.
- GRAND TOTAL outstanding portfolio: $652.9 million.
- Selected outstanding project amounts (exact figures preserved):
  - Bank Republic - MSE Loan (27-Apr-06): 1.3
  - Bank Republic - MSME (12-Dec-08): 10.0
  - Bank Republic Equity (15-Sep-06): 8.2
  - Bank Republic Mortgage Loan II (22-Aug-08): 14.0
  - Bank of Georgia - convertible subordinated debt (30-Dec-08): 26.0
  - Bank of Georgia - subordinated debt (30-Dec-08): 24.0
  - Bank of Georgia Senior Loan (30-Dec-08): 50.0
  - TBC Bank (07-Apr-09): 38.4
  - TBC Bank: Subordinated Loan (14-Apr-09): 18.5
  - Tbilisi International Airport (17-May-06): 22.3
  - Enguri Hydro power Plant Rehabilitation project (22-Dec-98): 20.6
  - Geo Steel (20-Oct-08): 14.0
  - Baku-Tbilisi-Ceyhan (BTC) Pipeline (03-Feb-04) [regional]: 45.1
  - Caucasus Online (22-Dec-08) [regional]: 30.6
- (All numeric values above are presented exactly as in the source table; currency unit implied US$.)

### IMF Executive Board Decision and Economic Assessment (Press Release No. 10/101, March 19, 2010)
- IMF action: Completed fifth review under 18-month Stand-By Arrangement (SBA) approved on September 15, 2008 for SDR 477.1 million (about US$ 729.2 million).
- Augmentation: On August 6, 2009, access under the SBA was augmented to SDR 747.1 million (about US$1,141.8 million) and extended until June 14, 2011.
- Completion of fifth review permits immediate purchase of SDR 97.3 million (about US$148.7 million).
- Executive Board modified end-March and end-June 2010 performance criteria on net domestic assets, net international reserves, and budget deficit; changed contracting/guaranteeing of nonconcessional debt from performance criterion to indicative target.

### IMF Observations, Projections, and Policy Recommendations
- Economic developments and projections:
  - Growth likely contracted by 4 percent in 2009.
  - GDP growth forecast for 2010: 2 percent.
  - 2009 fiscal deficit expected: 9.2 percent of GDP.
  - Fiscal deficit target for 2010: 7.4 percent of GDP.
  - Headline inflation for 2010 projected: 5 percent.
  - 2009 current account deficit expected to have declined by more than 10 percentage points compared to 2008.
- Policy guidance and commitments:
  - Fiscal policy to shift from crisis cushioning to securing medium-term sustainability.
  - Authorities’ strategy: expenditure-driven consolidation to reduce overall fiscal deficit from 9.2 percent of GDP in 2009 to under 3 percent by 2013.
  - 2010 spending cut targeted at almost 2 percent of GDP, mainly via lower administrative expenditures and subsidies.
  - Subsequent fiscal consolidation driven by phasing out capital spending, real wage freeze, and lower social spending as economy recovers.
  - Revenue administration strengthening and implementation of public action reform action plan to enhance transparency, efficiency and accountability of public finances.
  - Monetary policy measures to enhance effectiveness: increased issuance of CDs, consideration of raising reserve requirements, offering collateralized long-term credit with interest rates linked to the policy rate.
  - Commitment to a flexible exchange rate policy with interventions limited to smoothing excess volatility.
  - Financial sector measures: ongoing stress tests (sector and individual bank level), move to risk-based supervision including differentiated capital requirements implemented gradually.
- Risks and requirements:
  - Need for pickup of FDI and credit growth to sustain recovery.
  - Banks remain exposed to substantial credit risk from high NPLs and currency-induced credit risk despite improved capitalization and provisioning.
  - Authorities ready to adjust fiscal and exchange rate policies if crisis impact is larger and more protracted.

### Request and Program Status
- Authorities requested Board approval of completion of the 5th review and modified program conditionality.
- All end-December quantitative performance criteria were met by a wide margin.

*Source: ANNEX III. GEORGIA: RELATIONS WITH THE EBRD (As of January 31, 2010) and IMF Press Release No. 10/101 (March 19, 2010) as provided in the content unit.*

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