Press Release: IMF Staff Statement at the End of a Review Mission to Georgia

IMF News, December 8, 2015

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IMF mission led by Mark Griffiths visited Tbilisi November 9-21, 2015 to conduct discussions on the second and third reviews under Georgia’s Stand-By Arrangement (SBA) with the IMF.
Statement issued on December 8, 2015 by Mr. Griffiths.
IMF Communications Department contact information provided: Media Relations E-mail: media@imf.org; Phone: 202-623-7100.
End-of-Mission press releases convey preliminary findings of IMF staff teams and do not necessarily represent the views of the IMF’s Executive Board.

The Georgian Lari depreciated by more than 35 percent against the U.S. dollar over the past year.
Growth forecasts:
- 2.5 percent in 2015.
- 3 percent in 2016.
Inflation: Has picked up but should end the year only slightly above the National Bank of Georgia’s (NBG) inflation target of 5 percent.
Downside risk to the forecast mainly from further deterioration in trading partner economies.

External shock effects:
- Slowdown and currency depreciations in main trading partners lowered Georgia’s exports and remittances.
- Worldwide strengthening of the U.S. dollar contributed to Lari depreciation.
Current account:
- Projected to widen to 11 percent of GDP in 2015.
- Expected to improve to about 9 percent of GDP in 2016.
External debt around 100 percent of GDP; current account deficit will need to fall further over the medium term to improve sustainability.
Trade developments:
- Exports and remittances have bottomed out; tourist inflows are growing again.
- Imports fell by 8 percent in the third quarter compared to the last year (16 percent excluding one-offs).
Policy view: Depreciation has helped absorb the external shock by reducing imports, preserving competitiveness of domestic producers, and protecting the value of remittances.

Total government revenue expected to increase in 2015 because tax revenue performed well and non-tax revenue and grants were higher than projected.
Fiscal deficit:
- Expected to be at or only slightly above the 3 percent of GDP target in the original budget for 2015 despite higher spending.
- The 3 percent of GDP fiscal deficit proposed in the 2016 draft budget should support inclusive growth and improve external stability.
Spending pressures:
- Higher-than-projected spending on universal healthcare, subsidies, and reconstruction works caused by the June floods.
- Health spending in 2015 has been much higher than budgeted.
Fiscal risk management recommendations:
- Monitor healthcare spending closely in 2016 and introduce efficiency savings.
- Have contingency plans if spending overruns persist to keep the deficit to 3 percent of GDP.
- Manage fiscal risks from government guarantees carefully, including guarantees to backstop power-purchase agreements for hydropower investment.
- Put in place a framework in line with best international practice to monitor, assess, and fully disclose fiscal risks from such guarantees.

The mission strongly supports the NBG’s policy to allow the Lari to float and to limit foreign exchange interventions only to dampen excess exchange rate volatility.
Rationale:
- Intervening to resist likely long-lasting external shocks would not succeed and would only waste foreign currency reserves.
- A floating exchange rate is required to achieve the NBG’s main objective of price stability.
To continue fulfilling price stability and safeguard financial stability, the NBG should have full operational independence.
Constitutional Court ruling pending on legislation that removes banking supervision from the NBG.
- Important that banking supervision remains independent of political and industry interference and of high quality.
The mission and the authorities aim to agree on a strategy to keep banking supervision independent and to ensure a sufficient level of foreign reserves.

Substantial progress toward reaching a staff-level agreement on the second and third reviews.
Mission will finalize the letter of intent with the authorities in the coming weeks, including agreement on:
- Strategy to keep banking supervision independent.
- Ensuring sufficient level of foreign reserves.
- Improving the framework for managing and disclosing contingent liabilities.
- Structural reforms to promote growth.
If final discussions are successful, the second and third reviews can be completed in early 2016.
The mission thanked the President, the Prime Minister, other members of the government, and the NBG for open and constructive discussions.

Visit dates: November 9-21, 2015.
Statement date: December 8, 2015.
Lari depreciation: more than 35 percent against the U.S. dollar over the past year.
Growth forecasts: 2.5 percent in 2015; 3 percent in 2016.
NBG inflation target: 5 percent.
Current account deficit: projected 11 percent of GDP in 2015; about 9 percent of GDP in 2016.
Imports: fell by 8 percent in the third quarter compared to the last year (16 percent excluding one-offs).
External debt: around 100 percent of GDP.
Fiscal deficit target/proposal: 3 percent of GDP.

International Monetary Fund, Press Release: IMF Staff Statement at the End of a Review Mission to Georgia (December 8, 2015).