## _cr1517

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### Program performance and macroeconomic outcomes
- Growth:
  - Growth this year should reach the program’s 5 percent.
  - Seasonally-adjusted GDP grew by 1 percent from January to June.
  - Annual growth through June was broad based (construction, retail trade, manufacturing).
- Inflation and monetary stance:
  - Inflation through summer: 2–3 percent.
  - Core inflation: below 2 percent.
  - Expected end-year inflation: just below 4 percent (3.5 percent year average), within the program’s inner consultation band.
  - NBG policy rate held at 4 percent.
- Credit and dollarization:
  - Overall credit growth: 21 percent year-on-year (17 percent exchange rate adjusted).
  - Retail credit growth: 29 percent year-on-year.
  - SME credit growth: 16 percent year-on-year.
  - Corporate loans growth: 16 percent year-on-year.
  - Loan dollarization: around 60 percent.
  - Household deposit dollarization: just below 60 percent.
- External sector and financing:
  - Exports grew by 7 percent year-on-year in January-September.
  - Imports increased by 12 percent, worsening the trade balance by US$400 million (around 2½ percent of GDP).
  - FDI nearly 6 percent of GDP.
  - Official loans 2½ percent of GDP.
  - June IPO and LSE listing of TBC resulted in net inflows of around US$100 million (transaction caused a US$110 million drop in FDI statistics).
  - NBG purchased US$120 million in August; lari stabilized around GEL1.75 GEL/US$.
  - Nominal effective appreciation since start of year: close to 10 percent.
- Fiscal outturns and program targets:
  - Budget deficit in first nine months of 2014: 1.1 percent of GDP, ½ percent of GDP lower than planned.
  - All applicable performance criteria (PC) and the indicative target (IT) met.
  - Fiscal deficit target met by a large margin; NIR target met after NBG FX purchase in August; NDA target met comfortably.
  - End-September benchmark for study of obstacles to access to finance reset to December 2015.

### Outlook, risks, and scenarios
- Growth projections:
  - Growth in 2015 projected at 5 percent; authorities view 6 percent as possible.
  - South Caucasus gas pipeline expansion expected to boost demand by around US$400 million (2.5 percent of GDP) spread over four years.
- Current account and external adjustment:
  - Current account deficit expected to widen this year to 8½ percent of GDP.
  - Projected to decline under program baseline to 8 percent of GDP in 2015 and 5 percent of GDP by 2019.
  - A sustained drop in oil prices from US$100 to US$85 per barrel would reduce the current account deficit by around 0.7 percent of GDP (first-round effect).
- Risks:
  - Downside risks: potential external shocks and regional tensions; monetary policy normalization in advanced countries; Russia-Ukraine crisis impact on exports and remittances; low Euro area growth; high current account deficit and external debt.
  - Domestic political risk: 2016 parliamentary elections could reduce reform momentum.
  - A hypothetical 30 percent depreciation would increase public debt stock by 5 percent of GDP (peaking at 38 percent of GDP) and external debt stock by 30 percent of GDP (peaking at 94 percent of GDP).
- Upside opportunities:
  - EU DCFTA and attractive business environment.
  - Lower oil prices should help reduce the current account deficit and inflation, and boost growth.

### Fiscal policy findings, 2014 outturn and 2015 budget
- 2014 outturn:
  - Revenues could exceed program projections by GEL 70 million (0.2 percent of GDP).
  - Local government spending around GEL 120 million higher.
  - Net lending around GEL 40 million above projection.
  - Central government current spending around GEL 45 million lower.
  - Capital spending likely to fall short by about GEL 110 million (7 percent of capital budget, 0.3 percent of GDP).
  - Combined effect: deficit around 3.5 percent of GDP, below program target.
- Fourth quarter risk:
  - Fourth quarter projected deficit: 2½ percent of GDP, posing risk to the lari and end-December reserve target.
  - Staff encouraged contingency planning and improved communications.
- 2015 budget and measures:
  - Draft 2015 budget targets a 3 percent of GDP deficit; submitted to Parliament as a general government deficit of GEL 970 million (3.0 percent of GDP).
  - Social and public sector measures:
    - Old-age pensions increase from GEL 150 to GEL 160 per month, from October 2015; cost in 2015: GEL 28 million (0.1 percent of GDP); full year effect: GEL 85 million (0.2 percent of GDP).
    - Base salary for teachers increased from GEL 350 to GEL 400 per month; highest categories up to GEL 200 per month higher (from September 2015); cost in 2015: GEL 18 million (less than 0.1 percent of GDP); full year effect: GEL 52 million (0.2 percent of GDP).
    - Move beneficiaries from private insurance to universal health care; additional cost in 2015: GEL 60 million (0.2 percent of GDP).
    - Increase capital expenditure in 2015 by GEL 320 million (capital spending rises from 5.3 percent of GDP in 2014 to 5.8 percent of GDP in 2015).
      - Five largest projects (total cost for 2015): East-West Highway—GEL 370 million; internal roads—GEL 215 million; water and sewage—GEL 150 million; power transmission—GEL 90 million; gas supply—GEL 20 million.
  - Revenue measures to reach 3.0 percent deficit:
    - Raise excise taxes on cigarettes, alcohol, and telecommunications, generating GEL 138 million (0.4 percent of GDP).
    - Cigarette excises: increase from 0.75 GEL/pack to 0.90 GEL/pack effective January 1, 2015; introduce ad-valorem 5 percent effective July 1, 2015 (GEL 76 million).
    - Alcohol excises: beer 0.4 GEL/liter to 0.6 GEL/liter; double excise on spirits (e.g., vodka 3 GEL/liter to 6 GEL/liter; whisky 5 GEL/liter to 10 GEL/liter) effective March 1, 2015 (GEL 29 million).
    - Telecom excises: incoming international calls 0.15 GEL/minute (mobile) and 0.08 GEL/minute (fixed) effective January 1, 2015; generate GEL 33 million.
    - Abolish tax-free threshold for personal income tax for income earned from January 1, 2015; from 2016 no refunds on 2015 income—will save 0.4–0.5 percent of GDP.
  - Staff advice:
    - Cautioned phone excise might yield lower-than-expected revenues if international calls are price elastic; recommended increasing excises on diesel and other fuels instead.
    - Recommended indexation rather than ad hoc pension increases and better targeting of vulnerable pensioners.
    - Advised strengthening monitoring of local government spending and readiness to hold back spending to avoid balance of payments pressures.

### Monetary and exchange rate policy
- Framework and targets:
  - NBG continues to enhance monetary policy framework; NBG lowered its inflation target for 2017 to 4 percent (from 5 percent in 2015 and 2016 and 6 percent in 2014).
  - Monetary stance: policy rate kept relatively low given inflation below target.
  - Inflation expectations and communication:
    - Staff encouraged issuance of quarterly inflation reports on a fixed schedule and regular press conferences after every other MPC meeting starting early 2015.
- Reserves and FX operations:
  - Proposal: modify end-December 2014 NIR PC for a modest increase of US$35 million.
  - Gross international reserves would increase to US$3.1 billion (about 3.3 months of projected 2016 imports) by end-2015; would require about US$320 million foreign exchange purchases through the year.
  - Staff encouraged pre-announced auctions for reserve accumulation; NBG cited uncertainty about timing of inflows.
- Exchange rate policy:
  - Authorities reiterated commitment to floating exchange rates.
  - Lari relatively stable; staff argued a more competitive lari would help producers compete with imports and encourage new export production.
  - Staff encouraged limiting intervention if the lari comes under pressure in the fourth quarter and to allow it to float in line with market forces.

### Financial sector resilience, supervision, and crisis preparedness
- FSAP findings and indicators:
  - Asset-to-equity ratio: around 6.
  - Capital adequacy ratio: 18 percent (26 percent according to Basel definition).
  - Liquidity: 40 percent on average for the system (minimum requirement 30 percent).
  - NPLs: 3.6 percent (standard 90-day measure); NBG’s more conservative approach: 8.6 percent.
  - Vulnerabilities: almost 60 percent of loans in foreign currency; more than one third of balance sheet funded externally; about half of loans collateralized by real estate; loan-deposit ratio above 100 percent.
  - Credit growth: accelerated, raising the credit-to-GDP gap 2 percent above long-term trend; retail loan growth includes consumer loans, credit cards, installment credits.
- Supervision and reforms:
  - NBG and MOF signed memorandum of understanding to improve financial sector management and information sharing.
  - Legal amendments being prepared to improve regulation and supervision, guidelines for concentration risk under Basel III, and steps to improve training and retention of staff.
  - Measures for crisis preparedness: Financial Stability Working Group established; Partnership Fund required not to run a cash deficit; PF financing (debt plus equity plus guarantees) cannot exceed 100 percent of the equity of the private partner.
- Policy recommendations:
  - Continue implementing FSAP recommendations and strengthen forward-looking risk-based supervision.
  - Monitor recent increase in credit growth carefully.
  - Wait for access to finance study findings before deciding on a development finance institution; if established, ensure no market distortion, fiscal responsibility, transparency, and governance.

### Structural reforms, access to finance, and statistics
- Access to finance:
  - Revised structural benchmark: conduct a thorough study of access to finance (revised to December 2015) assessing market imperfections and whether a development finance institution is needed.
  - Study to consider existing government funds and scope for consolidating them.
- Tax administration reforms:
  - Abolish Alternative Audit program by end-April 2015.
  - Amend tax code to enable auditors to access third party data; establish unit to manage arrears; introduce single taxpayer accounts by end-June 2015.
- State funds and Partnership Fund:
  - Prepare assessment of government funds promoting access to finance; assessment completion now intended by December 2015 as part of Access to Finance study.
  - Partnership Fund will pursue only commercial objectives and not create contingent sovereign liabilities.
- Statistical improvements:
  - First census since 2002 conducted November 2014.
  - Draft amendments to Law on Statistics to make reporting to GEOSTAT compulsory; submit to Parliament in January and expect passage by March 2015 (structural benchmark, March 2015).
  - Quarterly unemployment data to be published starting in 2017 (LOI ¶24).
  - Develop GDP by expenditure in constant prices, publish by December 2015 (structural benchmark, December 2015).

### Debt sustainability analysis — key indicators and stress tests
- Public debt and financing needs (selected baseline figures):
  - Nominal gross public debt: 31.0 (2012), 30.0 (2013), 32.2 (2014), 32.7 (2015), 33.0 (2016), 32.7 (2017), 32.0 (2018), 31.2 (2019), 30.3 (projection series header).
  - Public gross financing needs: 5.1 (2012), 2.4 (2013), 3.8 (2014), 6.1 (2015), 5.5 (2016), 5.2 (2017), 5.5 (2018), 5.9 (2019).
  - External debt (percent of GDP): 65.4 (2013), 65.0 (2014), 63.3 (2015), 62.0 (2016), 59.8 (2017), 57.9 (2018), 55.7 (2019).
- Baseline macro assumptions:
  - Real GDP growth: 5.0 each year 2014–2019.
  - Inflation (GDP deflator): 3.8 (2014), 4.0 (2015–2019).
  - Primary Balance: -2.0 (2014), -1.5 (2015), -1.2 (2016), -1.0 (2017), -1.1 (2018), -1.1 (2019).
  - Effective interest rate: 2.8 (2014), 3.0 (2015–2018), 3.2 (projection later).
- Stress tests:
  - Real depreciation shock (30 percent depreciation) shows external debt rising significantly in the shock scenario (external debt rising to 83 in the shock scenario versus baseline 56 in figure summary).
  - Other scenarios include interest rate shock, growth shock, current account shock, and combined shocks using permanent one-half or one-quarter standard deviation perturbations.
- External vulnerability metrics:
  - Gross external financing need (in percent of GDP): 24.2 (2009), 21.6 (2010), 24.0 (2011), 26.9 (2012), 23.5 (2013), 25.7 (2014), 23.0 (2015), 21.4 (2016), 20.8 (2017), 20.8 (2018), 20.4 (2019).
  - Gross international reserves (millions USD): 2,823 (2013), 2,750 (2014), 3,053 (2015), 3,716 (2016), 4,608 (2017), 5,286 (2018), 6,028 (2019).
- Policy implication:
  - Debt sustainability materially unchanged since program launch; program aims to keep public debt firmly below 40 percent of GDP and gradually lower share of foreign currency denominated debt.

### Program implementation, financing, and staff appraisal
- Program status and financing:
  - Staff recommends completion of the First Review under the program.
  - Program has helped catalyze official financing and is fully financed through the next 12 months.
  - World Bank approved a policy loan of US$92 million; new US$75 million ADB policy loan under preparation; EU expected to disburse first tranche (€26 million).
  - Completion of the first review enables disbursement of SDR40 million (about US$58.1 million), bringing total disbursements under the arrangement to SDR80 million (about US$116.3 million).
- Staff appraisal and recommendations:
  - Program strategy appropriate: fiscal consolidation, inflation targeting, reserve accumulation, exchange rate flexibility, and improved competitiveness.
  - Risks tilted to the downside; structural reforms essential to sustain growth.
  - Fiscal: strengthen monitoring of local government spending; be ready to undershoot the deficit if external pressures rise; consider alternative revenue measures (e.g., fuel excises) to avoid undesirable distortions.
  - Monetary: current stance appropriate; tightening would be premature; NBG should monitor inflation expectations and publish quarterly inflation reports on a fixed schedule and hold regular press conferences from 2015.
  - Resilience: NBG should continue reserve accumulation per program targets and consider pre-announcing part of programmed foreign currency purchases in 2015.
  - Financial supervision: continue implementing FSAP recommendations and strengthen forward-looking supervision.
  - Development finance institution: wait for access to finance study findings; address market imperfections via collateral easing, restructuring facilitation, exit regime strengthening, disclosure improvements, and capital market deepening.

*Source: IMF staff report excerpts (cr1517).*

### 1. Risk Assessment Matrix ________________________________________________________________________  13

### 1. Risk Assessment Matrix

### Program performance
- Macroeconomic developments are broadly in line with the Fund-supported program.
- Growth this year should reach the program’s 5 percent, helped by the base effect from rapid growth in end-2013 and fourth quarter government spending.
- Seasonally-adjusted GDP grew by 1 percent from January to June; annual growth through June was broad based (construction, retail trade, manufacturing).
- Inflation has increased but remains below the National Bank of Georgia (NBG) 6 percent target:
  - Inflation through summer: 2–3 percent.
  - Core inflation: below 2 percent.
  - Expected end-year inflation: just below 4 percent (3.5 percent year average), within the program’s inner consultation band.
- Monetary policy: NBG policy rate held at 4 percent.
- Credit growth has strengthened domestic demand:
  - Overall credit growth: 21 percent year-on-year (17 percent exchange rate adjusted).
  - Retail credit growth: 29 percent year-on-year.
  - SME credit growth: 16 percent year-on-year.
  - Corporate loans growth: 16 percent year-on-year.
  - Loan dollarization: around 60 percent.
  - Household deposit dollarization: just below 60 percent (slightly increased).
- External sector:
  - Exports grew by 7 percent year-on-year in January-September.
  - Imports increased by 12 percent, worsening the trade balance by US$400 million (around 2½ percent of GDP).
  - Services balance improving (more high-spending tourists).
  - Remittances: small decline from Russia offset by receipts from Greece, Italy, Turkey.
- External financing:
  - FDI nearly 6 percent of GDP.
  - Official loans 2½ percent of GDP.
  - June IPO and LSE listing of TBC resulted in net inflows of around US$100 million (transaction caused a US$110 million drop in FDI statistics).
  - Moody’s and Fitch upgraded outlook to positive after program approval in July.
- Exchange rate and reserves:
  - NBG purchased US$120 million in August; lari stabilized around GEL1.75 GEL/US$.
  - Nominal effective appreciation since start of year: close to 10 percent (much since July).
  - Concerns over competitiveness due to real effective exchange rate appreciation.
- Fiscal outturns:
  - Budget deficit in first nine months of 2014: 1.1 percent of GDP, ½ percent of GDP lower than planned.
  - Revenue outperformance drivers: lower-than-anticipated personal income tax refunds; tobacco excise impact; tax administration gains; higher VAT (import growth and abolition of import VAT grace period).
  - Aggregate spending slightly above plan with composition shift from capital to current; local governments spent more due to summer local elections.
- Program targets and performance criteria:
  - All applicable performance criteria (PC) and the indicative target (IT) met.
  - Fiscal deficit target met by a large margin.
  - NIR target met after NBG FX purchase in August.
  - NDA target met comfortably.
  - No external arrears accumulation; Partnership Fund did not run a cash deficit.
  - End-September benchmark for study of obstacles to access to finance reset to December 2015.

### Outlook and risks
- Growth projections:
  - Growth in 2015 projected at 5 percent; authorities view 6 percent as possible (their potential), but program and 2015 budget based on 5 percent.
  - South Caucasus gas pipeline expansion expected to boost demand by around US$400 million (2.5 percent of GDP) spread over four years.
- Current account projections:
  - Current account deficit expected to widen this year to 8½ percent of GDP.
  - Projected to decline under program baseline to 8 percent of GDP in 2015 and 5 percent of GDP by 2019.
  - A sustained drop in oil prices from US$100 to US$85 per barrel would reduce the current account deficit by around 0.7 percent of GDP (first-round effect) relative to baseline.
- Risks:
  - Downside risks from potential external shocks and regional tensions; Georgia’s high current account deficit and external debt create large gross external financing needs.
  - Risk factors: regional tensions, monetary policy normalization in advanced countries, Russia-Ukraine crisis impact on exports and remittances, low Euro area growth.
  - External financing shortfalls could lead to lari depreciation, undermining stability given high loan dollarization and foreign currency external debt.
  - Domestic political risk: 2016 parliamentary elections could reduce reform momentum.
- Upside opportunities:
  - Attractive business environment and EU DCFTA offering investment opportunities.
  - Free trade agreement with Russia remains in place.
  - Democratic transition success could attract investors.
  - Lower oil prices should help reduce the current account deficit and inflation, and boost growth.
- Debt vulnerability:
  - Debt sustainability materially unchanged since program launch.
  - A hypothetical 30 percent depreciation would increase public debt stock by 5 percent of GDP (peaking at 38 percent of GDP) and external debt stock by 30 percent of GDP (peaking at 94 percent of GDP).

### Policy discussions — Fiscal policy
- 2014 fiscal outcome:
  - Budget deficit expected to fall slightly below program’s 3.7 percent of GDP target.
  - Revenues could exceed program projections by GEL 70 million (0.2 percent of GDP).
  - Local government spending around GEL 120 million higher.
  - Net lending around GEL 40 million above projection.
  - Central government current spending around GEL 45 million lower.
  - Capital spending likely to fall short by about GEL 110 million (7 percent of capital budget, 0.3 percent of GDP), mostly donor-financed projects.
  - Combined effect: deficit around 3.5 percent of GDP, below program target.
- Fourth quarter risks:
  - Fourth quarter projected deficit: 2½ percent of GDP, potentially putting pressure on the lari.
  - Staff cautioned the end-December reserve target left little room for intervention to defend the lari.
  - Staff encouraged contingency planning and improved communications.
- 2015 budget:
  - Government’s budget targets a 3 percent of GDP deficit (consistent with program).
  - Draft budget measures (submitted November 5):
    - Old-age pensions increase from GEL 150 to GEL 160 per month, from October 2015.
    - Modest expansion of drug coverage for some socially vulnerable under universal healthcare.
    - Base salary for all teachers increased from GEL 350 to GEL 400 per month; qualified teachers up to GEL 200 per month higher (from September 2015).
    - Increased public investment.
  - Revenue measures to finance spending while keeping deficit at 3 percent of GDP:
    - Raise cigarette and alcohol excises; introduce an excise on incoming international phone calls.
    - These measures should yield GEL 140 million (0.5 percent of GDP).
  - Staff advice:
    - Cautioned that phone excise might yield lower-than-expected revenues if international calls are price elastic; recommended increasing excises on diesel and other fuels instead.
- Social policy recommendations:
  - Pension policy:
    - Mission argued against ad hoc/discretionary pension increases; recommended indexation.
    - Even after proposed increase, pensions remain very low: less than US$100 per month.
    - Better targeting of vulnerable pensioners would allow larger, more effective increases.
    - Authorities recognize pension reform and higher domestic saving (including higher contributions) needed for future pensions.
  - Education spending:
    - Use increases to raise educational quality; Georgia scores poorly in international comparisons of educational attainment.
    - Public spending on education: 2.9 percent of GDP (compared to 4.7 percent in Central and Eastern Europe, and 4.1 percent in the CIS).
    - Base teacher salaries very low: GEL 350 per month (US$200).
    - Recommend rewarding best qualified teachers and addressing low student-teacher ratios.
- Social assistance targeting:
  - Current system: anyone scoring even marginally above eligibility cutoff loses all benefits, creating work disincentives and evasion incentives.
  - Government plans to introduce a cascading benefit system (with World Bank) to phase benefits out more gradually; hoped introduction in 2015.
- Tax policy:
  - Abolition of the tax-free threshold for personal income tax introduced in 2013:
    - No refunds in 2016 on income earned in 2015.
    - Abolition will generate annual savings of about 0.5 percent of GDP from 2016, to pay for full-year effect of pension and teacher salary increases.
    - Authorities accept regressivity but cite evasion and disincentive concerns for allowance.
    - Substantial increases in targeted social assistance and introduction of universal health care would help the poor.
- Budget execution improvements:
  - Local government spending control needs strengthening:
    - Local governments can spend more if revenues are higher and by drawing down deposits (about GEL 240 million (0.8 percent of GDP) at end-2013).
    - For 2014, local governments projected to run a 0.2 percent of GDP deficit (program assumed balance).
    - Starting 2015, budgets of all central and local units to be administered by the Treasury to improve monitoring of liquidity and expenditure classification.
  - Capital budget execution:
    - Faced project design and procurement delays; new Minister of Infrastructure and Regional Development committed to avoid repetition in 2015.

### Policy discussions — Monetary and exchange rate policy
- Monetary stance:
  - With inflation below target, policy rates kept relatively low.
  - NBG technical staff concerned stronger domestic demand, higher food prices, and partner country inflation might cause 5 percent target to be exceeded, possibly requiring higher policy rates.
  - Staff noted recent nominal effective exchange rate appreciation should lower inflation.
  - Commodity price declines should lower inflation; unclear monetary policy response to supply shocks.
  - NBG stressed model results are only one input; given uncertain environment (including demand risks in partner countries), NBG judged it premature to raise rates without convincing evidence of a threat to the inflation target.

*Source: IMF staff report excerpt (1. Risk Assessment Matrix).*

### 23. The authorities stressed their commitment to central bank independence, and the NBG

### 23. The authorities stressed their commitment to central bank independence, and the NBG

### Monetary policy framework and inflation targeting
- The NBG continues to enhance its monetary policy framework (LOI ¶15).
- Policies to encourage lari floating-rate loans and the government’s scheme to place treasury bills in banks and to hold long-term bank deposits have promoted dedollarization and should help strengthen the transmission mechanism.
- The NBG lowered its inflation target for 2017 to 4 percent, from 5 percent in 2015 and 2016 and 6 percent in 2014.

### Communication and constrained discretion
- Staff encouraged the NBG to enhance its communication strategy (LOI ¶17) to influence inflation expectations and support “constrained discretion”.
- Steps recommended include issuing the existing quarterly inflation report without delay on a fixed pre-announced publication schedule.
- The NBG agreed to start holding regular press conferences after every other MPC meeting, starting from early 2015, in addition to existing regular meetings with market participants following Monetary Policy Committee (MPC) meetings.

### Reserve accumulation and foreign exchange operations
- The NBG will continue to accumulate foreign reserves to protect against external vulnerabilities (LOI ¶10).
- Proposal: modify the end-December 2014 NIR performance criterion for a modest increase of US$35 million (and lower the NDA indicative target).
- Gross international reserves would then increase to US$3.1 billion (about 3.3 months of projected 2016 imports) by end-2015.
- This would require about US$320 million foreign exchange purchases through the year.
- Staff encouraged the NBG to accumulate reserves through a system of pre-announced auctions; the NBG cited uncertainty around timing of inflows and planned purchases around times of strong inflows, and agreed to discuss the issue during the next review.

### Exchange rate policy and external adjustment
- The authorities reiterated commitment to floating exchange rates.
- The lari has again become relatively stable against the dollar, reflecting market forces since the NBG has not intervened.
- Authorities questioned the efficacy of the exchange rate channel for external adjustment, arguing exports are largely supply driven with export prices determined in dollars in world markets.
- Staff argued a more competitive lari would help producers compete with imports and might encourage production of new export goods; staff agreed structural reforms are important.

### Financial sector resilience and vulnerabilities (FSAP findings)
- Stress tests in the FSAP show the banking sector is relatively resilient, though needs to strengthen capital and liquidity buffers.
- Reported asset-to-equity ratio: around 6.
- Capital adequacy ratio: 18 percent (26 percent according to Basel definition).
- Liquidity: 40 percent on average for the system, above the minimum 30 percent requirement.
- NPLs: 3.6 percent (standard 90-day measure); NBG’s more conservative approach puts them at 8.6 percent.
- Vulnerabilities identified:
  - Almost 60 percent of loans in foreign currency, including to unhedged borrowers, creating currency-induced credit risk.
  - More than one third of balance sheet funded externally, exposing banks to international market volatility.
  - About half of all loans collateralized by real estate (prices remain below pre-2008 peaks).
  - Loan-deposit ratio has declined but remains above 100 percent.
- Credit developments:
  - Credit growth has accelerated, raising the estimated credit-to-GDP gap 2 percent above its long-term trend.
  - Recent retail loan growth includes riskier products: consumer loans, credit cards, and installment credits.
  - Rapid credit growth has limited the increase in the NPL ratio (standard definition), even though NPLs themselves are growing.

### Financial supervision and crisis preparedness
- Authorities are incorporating FSAP recommendations to strengthen financial stability and supervision (LOI ¶19).
- The NBG has put in place a forward-looking comprehensive supervisory and regulatory approach, but weaknesses remain in crisis preparedness, management, and safety nets.
- Measures taken:
  - NBG and MOF signed a memorandum of understanding to improve financial sector management and information sharing.
  - Submitting legal amendments to improve regulation and supervision.
  - Developing guidelines for concentration risk (as part of Basel III).
  - Taking steps to improve training and retention of staff.

### Structural reform: access to finance and broader reforms
- Authorities agreed to conduct a thorough study of access to finance before deciding on establishing a development finance institution.
- Despite rapid SME loan growth, the government initiated a study of the credit market, seeking inputs from the World Bank and KfW (revised structural benchmark, December 2015).
- The study will:
  - Assess the extent of the access to finance constraint.
  - Analyze market imperfections behind it.
  - Propose solutions, including whether a development finance institution is the best means and if benefits outweigh potential costs.
  - Consider what to do with existing government funds and scope for consolidating them.
- The government’s decision on a development finance institution will be based on the study findings and consultations with the Fund and other partners.

- Other structural reforms under way:
  - Tax administration reform, supported by Fund technical assistance (LOI ¶26), including:
    - Abolition of the so-called Alternative Audit program by end-April 2015.
    - Legal amendments clarifying when revenue service auditors can access third party information.
    - Establishing a new unit to manage the stock of arrears.
    - Legal amendments facilitating the write-off of arrears.
    - Introducing single taxpayer accounts.
  - Inclusion of a fiscal risk statement in the 2015 budget (LOI ¶25).
  - Creation of working groups on capital market reform (in line with FSAP recommendations) and pension reform (with World Bank and ADB help).
  - Development of an action plan with timetable for introducing deposit insurance (structural benchmark, December 2015) (LOI ¶18); under the EU Association Agreement authorities committed to introducing deposit insurance by 2020.
  - Improved quality and coverage of national statistics:
    - November 2014: first census since 2002.
    - Draft amendments to the Law on Statistics to make reporting to GEOSTAT compulsory will be submitted shortly.
    - Quarterly unemployment data should be published starting in 2017 (LOI ¶24).

### Program modalities and financing
- The program has helped catalyze official financing and is fully financed.
- World Bank approved a policy loan of US$92 million.
- A new US$75 million ADB policy loan is under preparation.
- The EU is expected to disburse the first tranche (€26 million) of its Macro-Financial Assistance program this year.
- The program is fully financed through the next 12 months, with good prospects for adequate financing thereafter.
- Georgia’s capacity to repay the Fund remains strong: despite purchases under the program, Georgia is making net repayments to the Fund in 2014, with outstanding credit expected to fall to about 97 percent of quota by end-2014.

### Staff appraisal: macroeconomic stance and policy recommendations
- Program strategy: fiscal consolidation, inflation targeting with central bank independence, reserve accumulation, exchange rate flexibility, and improved competitiveness remains appropriate.
- Macroeconomic performance: recovery from 2013 slowdown; Russia-Ukraine crisis impact contained so far.
- Growth momentum should strengthen going into 2015, supported by usual fourth quarter increase in government spending; sustained growth requires ambitious structural reforms.
- Risks tilted to the downside: escalation of regional tensions or further Euro area disappointment could weigh on foreign investment and trade; political positioning ahead of 2016 general elections could falter implementation; downside partially offset by decline in oil prices and the EU DCFTA.
- Fiscal policy:
  - Implementation improved in 2014 but weaknesses remain, notably higher-than-planned current spending by local governments and underexecution of the capital budget for a second year.
  - Ministry of Finance should strengthen monitoring of local government spending.
  - Projected increase in fourth-quarter spending could lead to balance of payments pressures; government should be ready to undershoot the deficit by holding spending back.
  - 3 percent of GDP deficit in the 2015 draft budget confirms commitment to the program’s fiscal strategy.
  - Staff noted alternative measures (e.g., increase in fuel excises or recurring vehicle circulation tax) might be more desirable economically than an excise on incoming international phone calls.
  - Support for higher education spending conditional on reforms to improve quality and careful costings reflected in the medium-term fiscal framework.
  - Government should consider introducing rule-based regular pension increases to prevent large ad-hoc increases in pre-election years.
- Social protection and revenue composition:
  - Abolishing the tax-free threshold for personal income tax will disproportionately affect low-income households; targeted social assistance and universal health care need to provide sufficient compensation.
  - Economic Liberty Act restricts increases in general state taxes; government should consider more equitable revenue measures allowed, such as increasing and widening the base of property taxes, including moveable assets, and streamlining tax benefits to free industrial zones.
- Monetary policy:
  - Monetary stance is appropriate; tightening would be premature.
  - Although inflation increased recently, the lari’s appreciation and fall in commodity prices are likely to keep inflation low.
  - NBG should monitor developments and inflation expectations and adjust policy as needed.
  - Staff welcomes NBG’s commitment to publish quarterly inflation reports on a fixed schedule and hold regular press conferences from 2015.
  - Important to enhance cooperation between the NBG and the government and continue to respect NBG independence.
- Resilience and reserves:
  - Program helps strengthen resilience to external shocks.
  - Given vulnerabilities and heightened external risks, NBG should continue to accumulate foreign reserves in line with program targets.
  - NBG should limit intervention if the lari comes under pressure in the fourth quarter, allow it to float in line with market forces, and reverse some of its earlier appreciation.
  - Staff encourages the NBG to pre-announce part of its programmed foreign currency purchases in 2015 and to conduct smaller interventions in-between to prevent excess exchange rate volatility.
- Financial supervision:
  - Staff welcomes NBG’s intention to implement FSAP recommendations.
  - NBG should continue strengthening forward-looking risk-based supervision and monitor the recent increase in credit growth carefully.
- Development finance institution decision:
  - Staff supports waiting for access to finance study findings before deciding on creating a development finance institution.
  - Authorities should address credit market imperfections by easing collateral constraints, facilitating enterprise restructuring, strengthening the exit regime, improving disclosure and reporting, and deepening capital markets.
  - If a development finance institution is established, it should not distort markets, must operate in a fiscally responsible and sustainable manner, and practice good transparency and governance.

*Excerpt from IMF staff report chapter on Georgia.*

### 45. Staff recommends the completion of the First Review under the program. The

### _cr1517 - 45. Staff recommends the completion of the First Review under the program. The

### Recommendation and program status
- Staff recommends the completion of the First Review under the program.
- Authorities have met the performance criteria and demonstrated program commitment through:
  - Draft 2015 budget which targets a 3 percent of GDP deficit.
  - Decision to take a more considered approach to problems of access to finance.
  - Openness to new structural reforms, described as worthy of continued international support.
- Staff supports:
  - Modification of the end-December 2014 performance criterion on NIR.
  - Establishment of new end-June 2015 and end-December 2015 performance criteria.
  - Establishment of the ceilings and floors of the inflation outer bands for 2015, as set out in the Letter of Intent.

### Macroeconomic developments (figures and narrative highlights)
- Real GDP Growth Forecasts (Figure 1): GEOCEE 1/, RUSUKR, ARM; narrative: "Despite slow growth in the region ... Georgia's target growth rate of  5 percent is well  within reach."
- Monthly Real GDP Estimates (Index, 2013 = 100): Jan-13Jul-13Jan-14Jul-14 series shown; narrative: "... Georgia's target growth rate of  5 percent is well  within reach."
- Consumer Price Inflation (In Yo Y Percent Change): Headline, Food, Annual Average; narrative: "... inflation, driven by food prices, will  remain within  the program's consulation bands."
- Trade-Weighted Exchange Rates (Indices, Jan 2013 = 100): NEER, REER; narrative: "While imported inflation will remain low due to appreciation relative to  trading partners ..."

### Monetary developments (Figure 2 and selected indicators)
- Credit Growth by Sector (In YoY Percent Change): Corporate, SME, Retail; headline: "Credit is growing ..."
- Credit to the Private Sector (In Billions of National Currency): In National Currency, In FX, FX in Percent of Total (RHS); narrative: "... with more  lending in lari."
- Exchange Rate (Lari per US dollar): 1.60 1.65 1.70 1.75 1.80 (Jan-12 to Jul-14 shown); narrative: "... with more volatility in the exchange rate"
- Deposit Dollarization (In Percent of Total Deposits): series shows increase; narrative: "However, dollarization of  deposits has increased ..."

### External sector (Figure 3 and balance of payments highlights)
- Merchandise Exports (In Percent of GDP): Exports to Other Countries, Exports to Russia; narrative: "... although exports to  Russia have expanded."
- Remittance Inflows (In Percent of GDP): Russia, Greece and Italy, Other; narrative: "Remittances have remained stable, as the  drop  in inflows from Russia has been compensated by  an increase  in inflows from Greece  and Italy."
- Financing of the Current Account (In Percent of GDP): Net Official Inflows (incl. official transfers & Fund resources), FDI, Other Private Inflows, Capital and Financial Account; narrative: "FDI is the main source of financing of the current account deficit."
- Current Account Balance (Quarterly, In Percent of Annual GDP): series shows deficit increased in first two quarters of the year: "The current account deficit in the first two quarters of this year was higher than last year ..."

### Public finance developments (Figure 4 and budgetary indicators)
- Overall Balance (In Percent of GDP), Quarterly and Cumulative: "The spending pattern has been smoother  this  year  and the deficit is  on track to  reach  3.5 percent of  GDP."
- Revenue and Expenditure, Jan.-Sept.2014 (In Percent of GDP): Tax Revenue, Current Expenditure, Capital Expenditure, Overall Balance; note: "Revenues were higher and the deficit was lower  than anticipated in the first 9 months of 2014."
- Public Education Expenditure (In Percent of GDP): GEO vs CEE 1/; narrative: "The government  plans to increase  spending on education, which is low by regional standards ..."
- Education Indicators, Latest Available (In Percentile Rank - Higher is Better): Higher Education, Higher Education Quality, Staff Training; narrative: "... which should help to raise the comparatively low  level of educational quality in Georgia."

### Key projections and selected table highlights (as presented)
- Table 1. Georgia: Macroeconomic Framework, 2013–19 (selected lines reproduced exactly as in source)
  - Real GDP3.35.05.05.05.05.05.05.0
  - Nominal GDP (in billion of laris)26.829.229.231.935.238.442.045.8
  - Nominal GDP (in billion of U.S. dollars)16.116.116.717.919.421.323.325.5
  - GDP per capita (in thousand of U.S. dollars)3.73.63.94.24.55.05.56.0
  - GDP deflator, period average-0.73.53.84.05.04.04.04.0
  - Gross international reserves (in billions of US$)2.82.72.83.13.74.65.36.0
  - Current account balance (in percent of GDP)-5.7-8.4-8.5-7.9-7.0-6.4-6.0-5.0
  - Government debt 2/32.233.932.733.032.732.031.230.3
  - Deposit dollarization (in percent)62.163.662.961.458.457.055.854.6

- Table 2. Georgia: General Government Operations, 2013–19 (selected lines reproduced exactly as in source)
  - Revenues7,3867,9097,9828,7709,77110,62211,52112,499
  - Taxes6,6427,2247,2998,0309,0309,85210,72211,669
  - Expenditures8,0878,9898,9949,74010,72211,58512,57213,645
  - Current expenditures6,5157,2377,3147,7258,4429,0649,77510,540
  - Capital spending and net lending1,5721,7531,6812,0152,2802,5202,7973,105
  - Overall balance-700-1,080-1,012-970-951-962-1,050-1,146
  - Government debt 2/9,2499,95310,22811,44012,57313,53114,63715,727

- Table 3. Georgia: Summary Balance of Payments 2013–19 (selected lines reproduced exactly as in source)
  - Current account balance-926-1,347-1,418-1,413-1,356-1,360-1,412-1,288
  - Trade balance-3,493-4,041-3,993-4,203-4,379-4,631-4,901-5,150
  - Exports4,2464,4564,3064,5494,9675,3625,8016,292
  - Imports-7,738-8,497-8,299-8,752-9,346-9,993-10,701-11,443
  - Financial account1,1071,2491,3501,6831,9242,1642,0612,001
  - Overall balance3031149370666900743806
  - Gross International Reserves (-increase)4512267-303-663-892-678-742
  - Use of Fund Resources-382-134-135-68-3-8-65-64

- Table 4. Georgia: Monetary Survey 2013–15 (selected lines reproduced exactly as in source)
  - Broad money (M3)9.810.111.411.911.914.2
  - Lari Broad money (M2)5.45.26.16.36.27.5
  - Resident foreign exchange deposits4.44.95.35.65.76.6
  - Net foreign assets1.00.70.90.70.71.1
  - Private credit10.411.112.112.613.014.6
  - Broad money (M3)24.421.315.921.517.924.6

- Table 5. Georgia: Accounts of the National Bank of Georgia, 2013–15 (selected lines reproduced exactly as in source)
  - Net foreign exchange position3,1832,7253,0153,0682,9903,479
  - Gross International Reserves4,9024,4194,8364,8904,8605,498
  - Reserve money2,8542,6573,0743,2562,9633,521
  - Net international reserves (in millions of USD, at prog. exchange rates) 1/1,5551,3721,5551,5201,5681,830

- Table 6. Georgia: External Vulnerability Indicators, 2013–19 (selected lines reproduced exactly as in source)
  - Value of exports of goods and services, percent change19.22.76.48.98.68.68.8
  - Current account balance (percent of GDP)-5.7-8.5-7.9-7.0-6.4-6.0-5.0
  - External debt (percent of GDP) 1/65.465.063.362.059.857.955.7
  - Gross international reserves (in millions of USD)2,8232,7503,0533,7164,6085,2866,028
  - in months of next year's imports of goods and services3.43.13.33.74.34.64.9

- Table 8. Georgia: External Financing Requirements and Sources, 2013–19 (selected lines reproduced exactly as in source)
  - Total requirements-1,941-2,350-2,148-2,041-2,116-2,295-2,412
  - Current account deficit-926-1,418-1,413-1,356-1,360-1,412-1,288
  - Total sources1,9412,3502,1482,0412,1162,2952,412
  - Capital flows1,8632,1432,4382,6923,0022,9733,153
  - Change in reserves (- increase)45   67-303-663-892-678-742

### Program implementation and conditionality schedule (Table 9)
- Schedule of Prospective Reviews and Available Purchases (SDR millions, Percent of quota):
  - 30-Jul-14: Approve the 36-month SBA4026.7
  - 15-Nov-14: Complete the first review based on end-September 2014 performance criteria and other relevant performance criteria4026.7
  - 15-Feb-15: Complete the second review based on end-Dec 2014 performance criteria and other relevant performance criteria42.7
  - 15-Aug-15: Complete the third review based on end-June 2015 performance criteria and other relevant performance criteria42.7
  - 15-Feb-16: Complete the fourth review based on end-December 2015 performance criteria and other relevant performance criteria42.7
  - 15-Aug-16: Complete the fifth review based on end-June 2016 performance criteria and other relevant performance criteria42.7
  - 15-Feb-17: Complete the sixth review based on end-December 2016 performance criteria and other relevant performance criteria42.7
  - Total available10067

*Source: _cr1517 - 45. Staff recommends the completion of the First Review under the program. The*

### Annex I. Debt Sustainability Analysis

### Annex I. Debt Sustainability Analysis

### Key Indicators and Projections (Public Sector, baseline)
- Nominal gross public debt: 31.0 (2012), 30.0 (2013), 32.2 (2014), 32.7 (2015), 33.0 (2016), 32.7 (2017), 32.0 (2018), 31.2 (2019), 30.3 (projection series header).
- Public gross financing needs: 5.1 (2012), 2.4 (2013), 3.8 (2014), 6.1 (2015), 5.5 (2016), 5.2 (2017), 5.5 (2018), 5.9 (2019), 6.7 (later column).
- Real GDP growth (in percent): 6.7 (2012), 6.2 (2013), 4.1 (2014), 5.0 (2015), 5.0 (2016), 5.0 (2017), 5.0 (2018), 5.0 (2019), 5.0 (projection).
- Inflation (GDP deflator, in percent): 7.1 (2012), 1.2 (2013), -1.4 (2014), 3.8 (2015), 4.0 (2016), 4.0 (2017), 4.0 (2018), 4.0 (2019).
- Nominal GDP growth (in percent): 14.3 (2012), 7.5 (2013), 2.6 (2014), 8.9 (2015), 9.2 (2016), 10.3 (2017), 9.2 (2018), 9.2 (2019), 9.1 (projection column).
- Effective interest rate (in percent): 5.3 (2012), 3.5 (2013), 3.0 (2014), 2.8 (2015), 3.0 (2016), 3.0 (2017), 3.0 (2018), 3.0 (2019), 3.2 (later).

### Contribution to Changes in Public Debt (identified flows, 2012–2019)
- Change in gross public sector debt (cumulative): 2.0 (2012), 0.2 (2013), —, 2.2 (2014), 0.6 (2015), 0.3 (2016), -0.3 (2017), -0.8 (2018), -0.8 (2019), -0.9 (later) and cumulative -1.9.
- Identified debt-creating flows (by year): -2.9 (2012), -1.1 (2013), 0.6 (2014), 0.1 (2015), -0.4 (2016), -0.5 (2017), -0.8 (2018), -0.8 (2019), -0.9 (later), cumulative -3.3.
- Primary deficit (in percent of GDP): 2.3 (2012), 0.9 (2013), 0.9 (2014), 2.0 (2015), 1.5 (2016), 1.2 (2017), 1.0 (2018), 1.1 (2019), 1.1 (projection), cumulative 7.8.
- Primary (noninterest) revenue and grants (in percent of GDP): 26.2 (2012), 28.8 (2013), 27.5 (2014), 27.3 (2015), 27.5 (2016), 27.8 (2017), 27.6 (2018), 27.5 (2019), 27.3 (projection), cumulative 164.9.
- Primary (noninterest) expenditure (in percent of GDP): 28.5 (2012), 29.7 (2013), 28.4 (2014), 29.3 (2015), 29.0 (2016), 29.0 (2017), 28.7 (2018), 28.5 (2019), 28.3 (projection), cumulative 172.8.

### Automatic Debt Dynamics and Other Contributions
- Automatic debt dynamics (aggregate contribution): -3.2 (2012), -1.3 (2013), 1.3 (2014), -1.8 (2015), -1.8 (2016), -2.2 (2017), -1.9 (2018), -1.8 (2019), -1.7 (later), cumulative -11.2.
- Interest rate/growth differential: -2.6 (2012), -1.1 (2013), 0.1 (2014), -1.8 (2015), -1.8 (2016), -2.2 (2017), -1.9 (2018), -1.8 (2019), -1.7 (later), cumulative -11.2.
  - Of which: real interest rate contribution: -0.9 (2012), 0.6 (2013), 1.3 (2014), -0.3 (2015), -0.3 (2016), -0.7 (2017), -0.4 (2018), -0.3 (2019), -0.3 (later), cumulative -2.4.
  - Of which: real GDP growth contribution: -1.6 (2012), -1.7 (2013), -1.2 (2014), -1.5 (2015), -1.5 (2016), -1.5 (2017), -1.5 (2018), -1.5 (2019), -1.4 (later), cumulative -8.8.
- Exchange rate depreciation contribution: -0.7 (2012), -0.2 (2013), 1.2 (2014), remaining years not shown.
- Other identified debt-creating flows: -2.0 (2012), -0.7 (2013), -1.7 (2014), -0.1 (2015), -0.1 (2016), 0.5 (2017), 0.1 (2018), -0.1 (2019), -0.3 (later), cumulative 0.0.
  - GG: Privatization and Drawdown of deposits (negative): same series as other identified flows.
- Contingent liabilities: 0.0 for all years listed.
- Residual, including asset changes: 4.9 (2012), 1.3 (2013), 1.6 (2014), 0.5 (2015), 0.7 (2016), 0.2 (2017), 0.0 (2018), 0.0 (2019), 0.0 (later), cumulative 1.4.

### Baseline and Alternative Scenarios (assumptions and outcomes)
- Baseline macro assumptions (2014–2019): Real GDP growth 5.0 each year; Inflation 3.8 (2014), 4.0 (2015–2019 except 2017+ target 4.0); Primary Balance: -2.0 (2014), -1.5 (2015), -1.2 (2016), -1.0 (2017), -1.1 (2018), -1.1 (2019); Effective interest rate: 2.8 (2014), 3.0 (2015), 3.0 (2016–2018), 3.2 (projection).
- Historical scenario assumptions (2014–2019): Real GDP growth 5.0 (2014), 5.9 (2015–2019); Inflation same as baseline; Primary Balance: -2.0 (2014), -2.4 (2015–2019); Effective interest rate: 2.8 (2014), 3.0 (2015), 2.8 (2016), 2.6 (2017–2018), 2.7 (2019).
- Constant Primary Balance scenario: Real GDP growth 5.0 each year; Inflation same as baseline; Primary Balance -2.0 (2014–2019); Effective interest rate: 2.8 (2014), 3.0 (2015), 3.1 (2016), 3.0 (2017), 3.0 (2018), 3.2 (2019).

### Composition of Public Debt and Financing Needs (external and currency breakdowns)
- Gross nominal public debt (trend shown 2012–2019) and public gross financing needs (trend shown 2012–2019) are presented in the analysis (figures in percent of GDP).
- Maturity composition (by maturity): medium and long-term versus short-term trends (2003–2019) presented.
- Currency composition: local currency-denominated versus foreign currency-denominated public debt trends (2003–2019) presented.

### External Debt Sustainability and Financing (2009–2019)
- External debt (baseline external debt, percent of GDP): 61.7 (2009), 65.8 (2010), 61.5 (2011), 66.9 (2012), 65.4 (2013), 65.0 (2014), 63.3 (2015), 62.0 (2016), 59.8 (2017), 57.9 (2018), 55.7 (2019).
- Debt-stabilizing non-interest current account (percent of GDP): -7.7 (mentioned in projection header).
- Change in external debt: 16.5 (2009), 4.1 (2010), -4.4 (2011), 5.4 (2012), -1.5 (2013), -0.4 (2014), -1.7 (2015), -1.4 (2016), -2.2 (2017), -1.9 (2018), -2.1 (2019).
- Identified external debt-creating flows (sum of components): 12.8 (2009), -0.2 (2010), -6.3 (2011), 2.5 (2012), -0.7 (2013), 0.3 (2014), -1.3 (2015), -2.0 (2016), -2.3 (2017), -2.3 (2018), -3.0 (2019).
- Current account deficit, excluding interest payments (percent of GDP): 7.6 (2009), 7.5 (2010), 10.2 (2011), 8.7 (2012), 2.7 (2013), 5.5 (2014), 5.0 (2015), 4.1 (2016), 3.7 (2017), 3.3 (2018), 2.4 (2019).
- Deficit in balance of goods and services (percent of GDP): 19.1 (2009), 17.8 (2010), 19.0 (2011), 19.7 (2012), 12.9 (2013), 15.6 (2014), 14.9 (2015), 13.6 (2016), 12.6 (2017), 11.7 (2018), 10.7 (2019).
- Exports (percent of GDP): 29.8 (2009), 34.9 (2010), 36.5 (2011), 38.2 (2012), 44.7 (2013), 44.4 (2014), 44.0 (2015), 44.1 (2016), 43.7 (2017), 43.4 (2018), 43.1 (2019).
- Imports (percent of GDP): 48.9 (2009), 52.7 (2010), 55.5 (2011), 57.8 (2012), 57.6 (2013), 59.9 (2014), 58.9 (2015), 57.8 (2016), 56.3 (2017), 55.1 (2018), 53.8 (2019).
- Net non-debt creating capital inflows (negative): -6.3 (2009), -5.8 (2010), -6.2 (2011), -3.7 (2012), -5.2 (2013), -5.1 (2014), -6.2 (2015), -6.0 (2016), -5.9 (2017), -5.6 (2018), -5.4 (2019).
- Automatic debt dynamics contributions (external): 11.4 (2009), -1.9 (2010), -10.2 (2011), -2.4 (2012), 1.8 (2013), -0.1 (2014), -0.1 (2015), -0.1 (2016), -0.2 (2017), 0.0 (2018), 0.0 (2019).
  - Contribution from nominal interest rate: 2.9 (2009), 2.7 (2010), 2.6 (2011), 3.0 (2012), 3.0 (2013), 3.0 (2014), 2.9 (2015), 2.8 (2016), 2.7 (2017), 2.7 (2018), 2.7 (2019).
  - Contribution from real GDP growth: 2.0 (2009), -3.6 (2010), -3.8 (2011), -3.5 (2012), -2.7 (2013), -3.1 (2014), -3.0 (2015), -2.9 (2016), -2.8 (2017), -2.7 (2018), -2.6 (2019).
  - Contribution from price and exchange rate changes: 6.5 (2009), -1.1 (2010), -8.9 (2011), -2.0 (2012), 1.4 (2013), ... (further values omitted in source).
- Residual, including change in gross foreign assets: 3.8 (2009), 4.3 (2010), 1.9 (2011), 2.9 (2012), -0.8 (2013), -0.7 (2014), -0.4 (2015), 0.6 (2016), 0.1 (2017), 0.3 (2018), 0.9 (2019).
- External debt-to-exports ratio (in percent): 207.1 (2009), 188.7 (2010), 168.6 (2011), 175.3 (2012), 146.5 (2013), 146.6 (2014), 144.0 (2015), 140.4 (2016), 136.8 (2017), 133.5 (2018), 129.3 (2019).
- Gross external financing need (in billions of US dollars): 2.6 (2009), 2.5 (2010), 3.5 (2011), 4.3 (2012), 3.8 (2013), 4.3 (2014), 4.1 (2015), 4.2 (2016), 4.4 (2017), 4.9 (2018), 5.2 (2019).
- Gross external financing need (in percent of GDP): 24.2 (2009), 21.6 (2010), 24.0 (2011), 26.9 (2012), 23.5 (2013), 25.7 (2014), 23.0 (2015), 21.4 (2016), 20.8 (2017), 20.8 (2018), 20.4 (2019).

### Stress Tests and Bound Tests (external debt)
- Interest rate shock: baseline external debt 56 (percent of GDP) versus stress paths showing higher ratios (figures and timeline 2009–2019 shown).
- Growth shock, current account shock, combined shock, and real depreciation shock (30 percent depreciation scenario showing external debt rising to 83 in the shock scenario versus baseline 56).
- Scenarios use permanent one-half standard deviation shocks (individual) and permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance for combined shocks.
- Gross financing need under baseline and scenario comparisons presented (figures 2009–2019).

### Key Macroeconomic Assumptions Underlying Baseline (selected averages and series)
- Real GDP growth (percent): historical series includes -3.8, 6.3, 7.2, 6.2, 4.1, 5.9, then projected 4.5 and 5.0 for subsequent years and 5.0 across 2014–2019 in baseline.
- GDP deflator in US dollars (change in percent): -12.5, 1.7, 15.7, 3.4, -2.1, 9.2, 11.3, -1.4, 2.2, 3.4, 4.4, 4.3, 4.3 (series).
- Nominal external interest rate (in percent): 5.4, 4.8, 4.9, 5.4, 4.6, 4.6, 1.3, 4.8, 4.8, 4.9, 4.7, 4.9, 5.0 (series).
- Growth of exports (US dollar terms, percent): -13.0, 26.6, 29.6, 14.9, 19.2, 19.5, 13.0, 2.7, 6.4, 8.9, 8.6, 8.6, 8.8.
- Growth of imports (US dollar terms, percent): -29.8, 16.5, 30.5, 14.4, 1.5, 19.4, 20.4, 7.7, 5.4, 6.5, 6.9, 7.1, 6.9.
- Current account balance, excluding interest payments (percent of GDP): -7.6, -7.5, -10.2, -8.7, -2.7, -10.5, 5.4, -5.5, -5.0, -4.1, -3.7, -3.3, -2.4.
- Net non-debt creating capital inflows (percent of GDP): 6.3, 5.8, 6.2, 3.7, 5.2, 8.8, 4.3, 5.1, 6.2, 6.0, 5.9, 5.6, 5.4.

### Policy Commitments and Program Implications (from Letter of Intent, December 5, 2014)
- Program objectives: reduce external and fiscal vulnerabilities, promote inclusive growth.
- Policy mix: fiscal deficit reduction, inflation targeting, continued exchange rate flexibility, structural reforms.
- Program financing: request completion of First Review under the Stand-By Arrangement and intend to purchase a further SDR40 million, bringing drawings under this program to SDR80 million out of a potential SDR100 million.
- Monitoring: program to be monitored through quantitative performance criteria for end-June and end-December test dates, a continuous performance criterion, indicative targets, structural benchmarks and an inflation consultation clause; reviews semi-annually (Second Review based on end-December 2014 performance criteria expected on or after February 15, 2015; Third Review based on end-June 2015 performance criteria expected on or after August 15, 2015).
- Macroeconomic outlook and targets:
  - Growth: expect growth of at least 5 percent in 2014 and 2015; medium-term growth "even higher."
  - Inflation: inflation increased to 4.8 percent in September; target 5 percent for 2015–2016 (reach by mid-2015), and target 4 percent for 2017 and beyond.
  - Current account: project current account deficit of 8.5 percent of GDP in 2014; project 7.9 percent of GDP in 2015; aim for current account deficit of 6–7 percent of GDP during the program and around 5 percent of GDP in the longer term.
  - Reserves: target international reserves of at least 3.2 months of the following year’s imports, estimated at US$3.1 billion; request modification of end-December 2014 NIR performance criterion by US$35 million.
  - Fiscal: aim to reduce fiscal deficit to no more than 2.5 percent of GDP by 2017 and keep public debt firmly below 40 percent of GDP; no plans to issue public guarantees; will work to gradually lower share of foreign currency denominated debt.

*Source: IMF staff; Annex I. Debt Sustainability Analysis (As of March 21, 2014) and Appendix I. Letter of Intent (Tbilisi, December 5, 2014).*

### 12.      We will keep the 2014 fiscal deficit within the program ceiling of 3.7 percent of GDP

### 12.      We will keep the 2014 fiscal deficit within the program ceiling of 3.7 percent of GDP

### Fiscal performance and 2014 outturn monitoring
- Objective: keep the 2014 fiscal deficit within the program ceiling of 3.7 percent of GDP.
- Current spending in the first three quarters of the year was higher than projected—mostly at the local level due to the mid-year elections.
- Management and limits:
  - Determined to make sure that current spending does not exceed the limits set in the 2014 budget by more than GEL 80 million, or 0.3 percent of GDP.
- Investment and revenues:
  - Government investment spending was low in the first half of the year; picked up in recent months but expected to end the year slightly below the 2014 budget level, partly reflecting delays in donor-financed projects.
  - Revenues this year are expected to exceed projections, in part reflecting prudent GDP growth assumptions in the 2014 budget.
- Fiscal deficit expectation:
  - Higher-than-projected revenue, and somewhat lower-than-budgeted capital and current spending at the central level, will more than offset higher-than-budgeted current expenditure of local governments such that the fiscal deficit is expected to be kept below 3.5 percent of GDP, slightly below the program target.

### 2015 budget: deficit target and main elements
- Submitted to Parliament a 2015 budget with a general government deficit of GEL 970 million, equivalent to 3.0 percent of GDP (prior action for completing this First Review).
- Budget priorities: social protection, health care, education, agricultural development, and public infrastructure to support higher economic growth.
- Main elements and quantified measures:
  - Social spending cap: increasing social spending (pensions, health expenditure, and targeted social assistance) to no more than GEL 2,926 million. Since the economy is growing, this will reduce the deficit by 0.4 percent of GDP in 2015 relative to 2014.
  - Pensions:
    - Raise pension for all old-age pensioners and social benefits for group 1 disabled by GEL 10 from September 1, 2015.
    - Cost in 2015: GEL 28 million, 0.1 percent of GDP.
    - Full year effect: GEL 85 million (0.2 percent of GDP).
    - Plan to raise pensions further in 2016.
  - Health:
    - Move beneficiaries from private insurance to the universal health care system (March-September, 2014).
    - Additional cost in 2015 compared to 2014: GEL 60 million (0.2 percent of GDP), including extension of benefits to cover some pharmaceutical payments.
  - Targeted social assistance:
    - Maintain benefit levels constant in nominal terms.
    - Refine scoring methodology to identify different categories of vulnerable groups; move from interview-based binary eligibility to a more gradated system over the medium-term.
  - Education:
    - Pass a new Education Law to introduce new categories for teachers and classify all teachers.
    - From September 2015 increase salaries: highest categories by GEL 200 per month, other categories by GEL 50 per month.
    - Cost in 2015: GEL 18 million (less than 0.1 percent of GDP).
    - Full year effect: GEL 52 million (0.2 percent of GDP).
  - Capital spending:
    - Increase capital expenditure in 2015 by GEL 320 million, raising capital spending from 5.3 percent of GDP in 2014 to 5.8 percent of GDP in 2015.
    - Five largest investment projects in 2015 (total cost for 2015):
      - East-West Highway (various sections)—GEL 370 million;
      - internal roads (various sections)—GEL 215 million;
      - water and sewage systems—GEL 150 million;
      - power transmission system—GEL 90 million;
      - gas supply system—GEL 20 million.
  - Other spending:
    - Keeping spending on wages and salaries, and subsidies broadly constant in real terms; with economic growth this will reduce the deficit by 0.4 percent of GDP.
    - Goods and services kept constant as a percent of GDP to allow maintenance spending.

### Revenue measures to reach a 3.0 percent of GDP deficit
- Aggregate revenue-raising initiatives to reduce the budget deficit to 3 percent of GDP:
  - Raise excise taxes on cigarettes, alcohol, and telecommunications, generating GEL 138 million, 0.4 percent of GDP. Legislation submitted to Parliament as of November 2, 2014.
  - Cigarette excises (GEL 76 million):
    - Increase excise from 0.75 GEL/pack to 0.90 GEL/pack, effective January 1, 2015.
    - Introduce additional ad-valorem excise rate of 5 percent effective July 1, 2015. A draft law has been submitted to Parliament.
  - Alcohol excises (GEL 29 million):
    - Increase excise on beer from 0.4 GEL/liter to 0.6 GEL/liter.
    - Double excise on all types of spirits (e.g., vodka from 3 GEL/liter to 6 GEL/liter, whisky from 5 GEL/liter to 10 GEL/liter), effective March 1, 2015. A draft law has been submitted to Parliament.
  - Telecom excises (GEL 33 million):
    - Introduce excise of 0.15 GEL/minute and 0.08 GEL/minute for incoming international calls, applying to mobile phones and fixed lines, respectively, effective January 1, 2015.
    - These extra payments will not be eligible for VAT refunds.
    - Cut tax rate on domestic mobile phone calls from 10 percent to 8 percent.
    - Draft law submitted to Parliament; ready to take additional measures if revenues fall short.
  - Personal income tax threshold:
    - Abolish the tax free threshold for personal income tax, effective for income earned from January 1, 2015 onwards.
    - In 2015 still pay personal income tax refunds for income earned in 2014; from 2016 onwards there will be no refund payments—this will save 0.4–0.5 percent of GDP.
    - Additional revenue will fund the full year impact of 2015 pension and teacher salary increases.

### Monetary policy and financial sector measures
- Monetary policy framework:
  - Guided by the goal of price stability, achieved primarily through interest rate policy in an environment of exchange rate flexibility and central bank independence.
- Inflation outlook:
  - On track to meet inflation target of 5 percent by end-2015.
  - Past three years: inflation below target due to slowdown in 2013 growth, administrative price cuts on utilities, and relative strength of the lari.
  - Monetary policy in 2014 pursued accommodating stance to stimulate the economy and raise inflation towards the 6 percent target.
  - Expected inflation for 2014: average 3.5 percent and end-year around 4 percent.
  - Expected inflation for 2015: average around 4 percent.
- Communication and transmission enhancements:
  - Quarterly inflation reports published according to a set schedule; plan to issue the next report by November 26.
  - Starting in 2015, press conferences after every other MPC meeting (once per quarter).
  - Measures to promote use of the lari:
    - Broadened collateral to include high-quality loans for the NBG’s liquidity facilities.
    - Encouraged banks to introduce floating rate lari loans.
    - Government placed long-term lari deposits in commercial banks to encourage lari lending.
    - Result: share of dollar deposits held by residents fell from 70 percent in 2010 to less than 60 percent today.
    - Effects: strengthened monetary policy transmission and improved access to finance by making longer-term lari lending more attractive.

- Financial stability and regulatory strengthening:
  - IMF-World Bank FSAP concluded NBG’s regulatory and supervisory framework is robust; noted improvements and convergence toward international standards including Basel Core Principles (BCP).
  - Planned follow-up actions drawing on FSAP recommendations:
    - Continue implementation of Basel III, including enhancement of ICAAPs and active communication with bank directors and supervisory boards.
    - Conduct a study on the introduction of deposit insurance in Georgia, including feasible timing and underpinning commitments to the EU (study in cooperation with development partners). Based on the study, prepare an action plan with intermediate steps and a timetable for implementation (structural benchmark, December 2015).
    - Improve public communication on the health and strength of the financial sector; publish Financial Stability Reports on an annual basis starting in 2015 (structural benchmark, September 2015).
    - Enhance supervisory approach for concentration credit risk via revised guidelines for concentration risk (structural benchmark, December 2015).
    - Reassess NBG salary levels to maintain effective supervision and review training and education budget.
    - Prepare legal amendments for parliament to strengthen protection of supervisory staff and the NBG, clarifying modalities for legal protection and rights to provide legal representation, including financing legal costs for staff sued for actions taken in good faith.
    - Prepare legal amendments concerning transfers of significant ownership: expand definition of ‘significant shareholder’ to include persons acting in concert, oblige significant shareholders to notify the NBG before disposal of shares, and clarify banks’ notification obligations to the NBG of material negative information concerning shareholders.

- Crisis preparedness:
  - Signed a memorandum of understanding between the Ministry of Finance and the NBG establishing a Financial Stability Working Group to facilitate information exchange, cooperation, and joint crisis-management mechanisms.
  - The Working Group will discuss the NBG’s Financial Stability Report, which can be used as input into the Ministry of Finance’s Fiscal Risk Assessment document.

### Structural reforms, access to finance, and statistical improvements
- Structural reform commitment:
  - Continue wide range of structural reforms aligned with Georgia 2020, the Association Agreement with the EU, and development partners’ reform agendas.
  - Launch two new World Bank Development Policy Operations: one focused on private sector development, the other on inclusive growth.
- Access to finance concerns and actions:
  - Recent policies expanded access to credit; credit growth compared to previous year:
    - Credit grew rapidly at about 20 percent on average (16 percent at constant exchange rate): 28 percent to households and 15 percent to firms.
    - This is an increase from 2013 average credit growth of 12 percent.
  - FSAP identified obstacles to access to finance; response:
    - Plan a comprehensive access to finance study, deeper than initially envisioned, drawing on World Bank and KfW findings, expected completion by late 2015 (structural benchmark end-December 2015).
    - Study to analyze causes of market failures and appropriate institution types/functions to address them; guided by principles of not distorting markets, not competing with commercial banks, avoiding undue fiscal risks, and ensuring transparency and governance.
    - Consult with IMF and development partners on mandate, policy instruments, structure, and operational and financial settings before legislative changes.
- State funds, enterprises, and the Partnership Fund:
  - Prepare a comprehensive assessment of Government funds promoting access to finance and investment; work with World Bank to review largest funds and prepare an action plan including possible consolidation. Assessment completion now intended by December 2015 as part of Access to Finance study.
  - Under Development Policy Operation, work with World Bank to reorganize and/or close approximately 200 state enterprises.
  - Partnership Fund operations:
    - Continue minority co-financing to catalyze commercially viable projects with developmental objectives.
    - Partnership Fund financing (debt plus equity plus guarantees) will not be allowed to exceed 100 percent of the equity of the private partner in the project.
    - Partnership Fund will pursue only commercial objectives and will not run a cash deficit (performance criterion).
- Statistical improvements:
  - Conducting a census in 2014, the first since 2002.
  - Developing GDP by expenditure in constant prices; on track to publish by December 2015 (structural benchmark, December 2015).
  - Prepare a revised Law on Statistics by end of the year to make it mandatory for businesses to report to GEOSTAT; submit Law to Parliament in January and expect passage by March 2015 (structural benchmark, March 2015).
  - Improve labor force statistics and start publishing unemployment rates each quarter, including rural-urban unemployment rates (structural benchmark, end-March 2017).
- Fiscal transparency enhancements:
  - With IMF help, issue for the first time a fiscal risk statement together with the 2015 budget comprising disclosures on macroeconomic and debt-related risks (structural benchmark, end-December 2014).
  - By end-2015 expand risk analysis to include risks from large state-owned enterprises and quasi-fiscal activities (structural benchmark end-December 2015).
  - From 2015, budgets of all central and local units—including Legal Entities of Public Law with the exception of schools—will be executed by the Treasury, with cashflows integrated into the Treasury Single Account to better monitor local governments’ liquidity and improve expenditure classification for consolidated general government finance forecasting.

*Source: _cr1517 - 12.      We will keep the 2014 fiscal deficit within the program ceiling of 3.7 percent of GDP*

### 26.      We are continuing with the reforms of tax administration set out in our July Letter of

### _cr1517 - 26.      We are continuing with the reforms of tax administration set out in our July Letter of

### Tax administration reforms: progress, measures, and benchmarks
- Overall commitment:
  - "We are continuing with the reforms of tax administration set out in our July Letter of Intent."
  - With IMF help, actions include: strengthening tax audit capacity, improving filing compliance, better management of uncollectible arrears and refund arrears.
  - Plan to request follow-up technical assistance from the Fiscal Affairs Department (FAD) to improve: accuracy of the taxpayer register, filing of tax returns, disputes resolution, taxpayer audit, and to reduce tax refund arrears.
- Taxpayer audit:
  - Approved decision to abolish the alternative tax audit program by early 2015 (structural benchmark, end-April 2015).
  - Significantly reduced number of private alternative auditors.
  - Started recruiting staff to ramp up audit capacity by end-April 2015.
  - Drafted amendments to the tax code to enable GRS auditors to access bank account and third party data.
- Arrears management:
  - Established an organizational unit under the tax administration department to manage debt in 2014.
  - Drafted legislative amendments to be introduced in the current session of Parliament to facilitate the write-off of uncollectible debt.
- Tax refund arrears:
  - Developed plans to introduce single taxpayers’ accounts in 2015 (structural benchmark, end-June 2015) to help avoid build-up of overdue refunds.
  - Plan to undertake a project audit to improve accuracy of large credit balances owed to taxpayers and to follow a risk-based approach to verifying credit returns.

### Land registration and cadastre development
- Ongoing development:
  - "We are in the process of developing a cadastre."
- Support and pilot:
  - With USAID support, prepared a package of draft legislative changes to increase the quality of ownership rights registration and ensure better protection of property rights.
  - An Irrigation and Land Market Development Project (covering 11 pilot areas throughout Georgia), financed by the World Bank, will test policies and procedures for registration of agricultural land to allow the majority of existing land ownership rights to be registered (regularization).
  - Pilot will inform design of a national land registration program to choose the right direction for a cadastre with full coverage and a registration system ensuring high data quality and security of property rights.

### Safeguards assessment of the National Bank of Georgia (NBG)
- Assessment outcome:
  - "We have completed an updated safeguards assessment of the NBG."
  - The IMF’s Finance Department assessment found the NBG’s overall governance framework is "broadly appropriate."
- Systems and controls:
  - Since 2009, majority of the NBG’s systems upgraded; many key operations now largely automated.
  - Controls strengthened in areas relevant to safeguards: foreign reserves management, government banking, and currency and vault operations.
  - Fund’s safeguards policy requirements for direct budget financing are in place.

### Structural benchmarks and selected program targets (selected items from the source)
- Structural benchmarks (selected):
  - Submission of final draft of the 2015 budget to Parliament with a deficit of no more than 3.0 percent of GDP and including measures from the LOI — Prior Action (date listed in table).
  - Abolish the alternative tax audit program — End-April 2015.
  - Introduce a single taxpayer account system in the General Revenue Service — End-June 2015.
  - Consolidate LEPLs in the 2014 government financial statements — End-June 2015.
  - Approve the budget for 2015 with 3 percent of GDP deficit — End-Dec 2014.
  - Other fiscal, financial sector, and statistics benchmarks listed in Table 3 (dates and items preserved in source).
- Inflation consultation targets and bands (Table 1 summary from source):
  - Central point: 5 4.8 5 5 5 5 5 (table formatting preserved in source).
  - Inner band, upper limit/lower limit: 7/3 repeated for listed periods.
  - Outer band, upper limit/lower limit: 8/2 repeated for listed periods.
- Quantitative performance criteria and indicative targets (selected figures from Table 2):
  - Ceiling on the General Government cash deficit (in mn lari): 810 810 320 1,080 1,080 290 970 (table entries as presented).
  - In Percent of GDP: 2.8 2.8 1.1 3.7 3.7 0.9 3.0 (table entries as presented).
  - Ceiling on Expenditures of the General Government: ... ... ... 9,012 9,012 ... 9,740 (table entries as presented).
  - Floor on NIR of NBG (End-period stock, in mn USD): 1,510 1,509 1,574 1,520 1,555 1,568 1,830 (table entries as presented).
  - Indicative Targets — Ceiling on NDA of NBG (End-period stock, in mnl lari): 450 450 33 600 353 219 320 (table entries as presented).

### Definitions and reporting standards (selected operational details)
- Program exchange rate assumptions (paragraph 2 / Table 1 excerpt):
  - "The Georgian Lari to U.S. Dollar exchange rate is assumed to be GEL 1.75 = $1 for the purpose of the program."
  - Program exchange rate table entries: SDR 0.65; GEL 1.75; EUR 0.73 (entries preserved as in source).
- General government definition:
  - General government = central government and local governments, excluding Legal Entities of Public Law.
  - Public sector = general government, Legal Entities of Public Law and public financial and non-financial corporations, including the National Bank of Georgia.
- Reporting commitments:
  - Treasury Department to provide monthly revenues of the general government within two weeks of the end of each month.
  - Monthly expenditures and arrears of the central government within four weeks of the end of each month.
  - Stock of general government debt, broken down by currency and original maturity within one month from the end of each quarter.
  - Treasury to provide daily cash balances in all accounts of the general government as of the end of the previous business day.
- Cash deficit of the general government (definition highlights):
  - Measured from financing side at current exchange rates as sum of: i) net domestic financing from banks and nonbanks; ii) net external financing; and iii) privatization receipts.
  - Net external financing includes loans disbursed for budget support and project financing, net change in external arrears, change in accounts abroad, minus amortization and net deposit accumulation in the state budget’s foreign currency account.
  - Privatization receipts include proceeds from sales of shares, nonfinancial assets, leases, and sale of licenses with duration of 10 years or longer.
- Net international reserves (NIR) of the NBG:
  - NIR definition: foreign assets of the NBG minus foreign liabilities of the NBG, including all of Georgia’s liabilities to the IMF.
  - Foreign assets include gold, gross foreign exchange reserves, Georgia’s SDR holdings, and reserve position in the IMF.
  - For program monitoring, stock of NIR valued at program exchange rates. "The stock of NIR amounted to US$1,452 million as of March 31, 2014 (at program exchange rates)."
- NIR adjustors (selected):
  - Adjust upward/downward by 50 percent for any excess/shortfall in balance of payments support loans and balance of payment support grants relative to projected amounts presented in Table 3.
  - Adjust 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 3.
- Projected Balance of Payment Support Financing (Table 3 entries as presented):
  - "Balance of payments support loans and grants / Project loans and grants / December 31, 2014 224.7169.1"
  - "June 30, 2015 0108.6"
  - "December 31, 2014 202.2197.4"
  - Note: Table entries are presented verbatim as in source.

*Source: _cr1517 - 26.      We are continuing with the reforms of tax administration set out in our July Letter of Intent (excerpts provided).*

### 21.      Supporting material: Data on net international reserves (both at actual and program

### _cr1517 - 21. Supporting material: Data on net international reserves (both at actual and program exchange rates); net foreign financing; and related fiscal and institutional arrangements

### Net international reserves (NIR) and reporting requirements
- Weekly reporting: Data on net international reserves (both at actual and program exchange rates); net foreign financing (balance of payment support loans, cash grants to the general government, amortization (excluding repayments to the IMF), interest payments on external debt by the Ministry of Finance and the NBG; and conversions for government imports) will be provided to the IMF in a foreign exchange cash flow table (which includes details of inflows, outflows and net international reserves) on a weekly basis within three working days following the end of the week.

### Ceiling on Net Domestic Assets (NDA) of the NBG
- Definition:
  - Net domestic assets (NDA) of the NBG are defined as the difference between reserve money and NIR as defined above in paragraph 19.
  - The ceiling on NDA is defined as projected reserve money minus the target NIR.
  - Stock example: Thus defined, the stock of NDA amounted to GEL -21 million on March 31, 2014.
- Adjustors:
  - The ceiling on the NDA of the NBG will be adjusted:
    - Upward/downward by 50 percent for any shortfall/excess in the balance of payments support loans and balance of payments support grants relative to the projected amounts presented in Table 3.
    - Upward/downward by 50 percent for any shortfall/excess in the disbursement of the project loans and project grants to the treasury single account at the NBG relative to the projected amounts presented in Table 3.
- Supporting material:
  - The NBG will provide to the IMF its balance sheet, which includes data on reserve money and net domestic assets on a daily basis.
  - Data will be provided using both actual and program exchange rates.

### Continuous performance criterion: Accumulation of general government external arrears
- External debt definition:
  - External debt is defined as set forth in point No. 9 of the Executive Board Decision No. 6230-(97/140), as revised on August 31, 2009 (Decision No. 14416-(09/91).
  - External debt is defined as debt contracted by the general government with nonresidents other than the IMF.
- External arrears definition:
  - External arrears are defined as unpaid external debt service by the general government to official and private creditors beyond 30 days after the due date.
- Supporting material:
  - Details of external 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.

### Appendix to the TMU: The Partnership Fund (PF) — organization, mandate, and risk control
- Legal structure and corporate governance:
  - The Partnership Fund (PF) is incorporated as a Joint Stock Company (JSC).
  - Governance structure includes:
    - An investment board, currently composed of internal members (CEO, CIO, portfolio officers) and can add external members (like experts and private sector representatives), which approves business cases and initiates projects;
    - A risk management committee, composed of internal members (CFO, Chief Legal Officer, and Chief Accountant), which advises on project risks to be reflected in project implementation agreements;
    - A supervisory board (i.e. board of directors), which approves projects (based on the feasibility studies, risk assessments, and business cases presented by the investment board and risk committee) and approves budget for project development needs. The supervisory board includes members of the government and is chaired by the Prime Minister;
    - In cases of equity participation in projects, the PF needs government approval.
- Corporate mandate:
  - The corporate mandate of the PF is approved by the supervisory board and the government.
  - The PF will provide project financing through equity participations, senior loan, quasi-equity through subordinated convertible debt, and performance bonds/guarantees.
  - Investments will focus on the following sectors: energy, agriculture, manufacturing, and real estate.
  - Under its corporate mandate, the PF is not allowed to provide financing to the service industry.
  - The PF will charge market rates for services provided.
- Portfolio management strategy:
  - The PF’s portfolio management strategy sets portfolio limits, performance management objectives, and project evaluation guidelines.
  - Principles include:
    - The PF will participate only in commercially viable projects; and
    - The PF’s performance will be monitored on the basis of the following evaluation criteria: IRR, APV, sharp ratio, and risk adjusted return.
- Project development methodology:
  - The PF will only participate in projects in which a corporate investor, with sufficient experience in industry, expresses its willingness to take an equity participation that represents at least 51 percent of the project’s total equity.
  - PF financing (debt plus equity plus guarantees) will not be allowed to exceed 100 percent of the equity of the private partner in the project.
  - The PF will pursue only commercial objectives.
- Reporting and auditing:
  - The PF will engage an internationally recognized auditing company to conduct semi-annual IFRS audits of its financial statements.
  - The PF will hire on a permanent basis the services of rating agencies, which will prepare regular ratings reports—there will no minimum rating requirement for the PF.
  - The PF’s audited financial statements, as well as the ratings reports will be available on permanent basis to a broad audience.
- Fiscal risk containment:
  - Fiscal risks associated with the PF will be limited since:
    - The PF projects don’t create any kind of contingent liability for the sovereign balance sheet, as the government has no legal obligation to bail out the PF, should it become illiquid or insolvent;
    - All liabilities of the PF are limited to its own balance sheet;
    - The PF has its own revenue sources, namely: the dividends from its investments, the interest earnings from the loans it provides, the fees it charges on the guarantees it provides, and the proceeds of asset sales;
    - The PF may decide to borrow from credible financial institution with recourse to its balance sheet facility and without state guarantee.

### Press Release excerpt: IMF Executive Board — First review of Stand-by Arrangement with Georgia (Press Release No. 14/597, December 19, 2014)
- Board actions and disbursement:
  - The Executive Board completed the first review of Georgia’s economic performance under the three-year Stand-By Arrangement (SBA).
  - The completion of the review enables the disbursement of SDR40 million (about US$58.1 million), bringing total disbursements under the arrangement to SDR80 million (about US$116.3 million).
  - The SBA with a total access of SDR100 million (about US$145.4 million) was approved by the Executive Board on July 30, 2014.
  - The Board’s decision was taken without a meeting.
- Macroeconomic developments and program status:
  - Growth of 5 percent is expected for 2014, helped by strong domestic demand and the fiscal expansion.
  - Inflation has gradually increased but remains below the target of 6 percent for 2014.
  - The current account deficit has widened to 8.5 percent of GDP as expected with this year’s economic recovery.
  - Although fiscal policy remains supportive to growth, the fiscal deficit is expected to come in lower than the 3.7 percent of GDP projected in the program.
  - Program performance is on track with all criteria and indicative targets met as of the end-September 2014 test date.
  - Inflation has also been well within the bands set by the program.
  - The study of possible obstacles to access to finance was not completed by September as expected under the program. It will instead be completed in 2015, to allow more time to incorporate inputs from key development partners and to make a deeper assessment.
- Policy assessment and outlook:
  - The program’s strategy of medium-term fiscal consolidation, inflation targeting with central bank independence, strengthening resistance to external shocks and improved competitiveness remains appropriate.
  - Structural reforms remain essential to sustain growth.
  - The authorities continue to be committed to fiscal adjustment, as evident by a 2015 budget that reduces the deficit to 3.0 percent of GDP.
  - External adjustment remains a priority, and the flexible exchange rate regime helps to preserve competitiveness, as exchange rates in partner countries adjust.
  - Although there are downside risks, the recent fall in oil prices could boost growth and reduce the current account deficit.

*Source: Excerpted content from the IMF document titled “_cr1517 - 21. Supporting material: Data on net international reserves (both at actual and program exchange rates); net foreign financing; and related fiscal and institutional arrangements.”*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1517.pdf_