Press Release: IMF Approves Three-Year Loan for the Republic of Georgia Under the ESAF

February 28, 1996

The International Monetary Fund (IMF) today approved a three-year loan for the Republic of Georgia totaling the equivalent of SDR 166.5 million (about $246 million) under the enhanced structural adjustment facility (ESAF)1 in support of the Government's economic and structural reform program during the period 1996-98.


Following its independence in 1991, Georgia faced severe disruptions in its trade and payments operations and sharply increased energy import costs. The economy also suffered from civil conflicts, a war in the Abkhazia region, and the disruption of trade by hostilities in neighboring countries. By 1994, these shocks had caused economic activity to decline to less than a third of its 1990 level, while an unsustainable fiscal stance and accommodating monetary policy fueled hyperinflation.

As political stability improved in early 1994, the Government launched an IMF-supported reform program that was successful in halting hyperinflation, stabilizing the exchange rate, reversing chronic currency substitution, and introducing important structural changes. The stabilization program laid the groundwork for the successful introduction of a new national currency, the lari, in September 1995. The Government of Georgia is determined to consolidate its recent economic achievements in order to establish the necessary conditions for the resumption of economic growth, and to accelerate the transition to a market economy, while improving social protection.

Medium-Term Strategy and the 1996–98 Program

Under Georgia's medium-term strategy, the main macroeconomic objectives of the 1996-98 program are an average annual growth rate of between 8 and 10 percent, the reduction of inflation to less than 10 percent by end-1998; the reduction of the external current account deficit to 4.2 percent in 1998 from 15.3 percent in 1995, and the strengthening of the country's international reserves position. To these ends, fiscal policy will seek to reduce the overall deficit of the General Government to about 3 percent of GDP in 1998 from about 6 percent in 1995. Tax revenues will be raised in order to finance essential current government expenditures, while the financing of capital investment will rely mainly on external resources. To improve revenue performance, the Government will limit tax exemptions, expand the tax base, and strengthen tax and customs administration. A tight monetary program will remain in place to attain the inflation objectives of the program. The program also envisages a number of structural reforms to facilitate the complete transition to a market economy.

Within this medium-term strategy, the program for 1996 aims at an annual growth rate of 8 percent, an inflation rate of 20-25 percent by year-end; an external current account deficit of 7.1 percent of GDP; and international reserves of nearly 2.7 months of projected 1996 imports. To attain these objectives, the overall deficit of the General Government is targeted to decline to 3.4 percent of GDP as tax revenues for 1996 are expected to increase to 6.7 percent of GDP from an estimated 3.7 percent of GDP in 1995.

Structural Reforms

The structural reforms to be implemented under the program include elaboration of an adequate legal framework for a market economy, reform of commercial banks, acceleration of privatization, further progress toward the full liberalization of prices and of the exchange system, continued restructuring and downsizing of the Government, and a broad range of sectoral policies. A program currently under way comprises the privatization of 325 medium- and large-scale enterprises and a reduction of the number of enterprises exempted from privatization.

Agricultural land laws will set the stage for full ownership rights, thereby creating a market for land, and will allow it to be used as collateral for bank loans. The block on government subsidies to the energy sector will continue. Financial balance in the sector will be sought through improvements in revenue collection and the restructuring of the state gas and electricity companies. A bank restructuring strategy developed by the authorities aims at limiting the growth of banks that do not meet certain capital and prudential banking standards and at facilitating the establishment of reputable foreign banks.

Addressing Social Costs

The limited resources available for the social safety net has led the Government to target the most vulnerable households in order to maximize benefits. Since late 1994, a number of nontargeted programs have been limited or eliminated. The process will continue in 1996 while the Government improves its poverty monitoring capacity. A national household survey is planned for 1996 and will be used as the main source of information for a detailed poverty assessment study. In the 1996 budget, the Government has raised the retirement age by five years, which will allow pensions to be gradually increased from their currently low levels.

The Challenge Ahead

Notwithstanding the important strides made so far, Georgia still faces daunting economic challenges that need urgent attention in the next few years. Acceleration of reforms in the areas of public finances, government restructuring, privatization, and energy will enhance prospects for economic growth and reverse the steep decline in living standards that has occurred since 1991. The Republic of Georgia joined the IMF on May 5, 1992, and its quota1 is SDR 111.0 million (about $164 million). Georgia's outstanding use of IMF credit currently totals SDR 77.7 million (about $115 million).

Georgia: Selected Economic Indicators

  1994 1995* 1996** 1997** 1998**

(percent change)
Real GDP -11.4 -5.0 8.0 10.0 10.0
Consumer prices
7,144 64.8 23.1 8.5 6.6
(percent of GDP)
General goverment balance,
    (deficit –)
–16.5 –5.8 –3.4 –3.1 –3.0
External current account balance,
    excluding grants
    (deficit –)
-- –15.3 –7.1 –5.4 –4.2
(months of imports)
International reserves -- 2.5 2.7 3.0 3.3

Sources: Georgian authorities; and IMF staff estimates.

1. The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent and are repayable over 10 years, with a 5 1/2-year grace period.  

2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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