Press Release: IMF Approves Augmentation and Extension of Georgia's ESAF Loan

July 23, 1999

The International Monetary Fund (IMF) today approved an augmentation of SDR 5.55 million (about US$7.50 million) and an extension to August 13, 1999 of Georgia's Enhanced Structural Adjustment Facility (ESAF)1 that was approved on February 28, 1996 in an amount equivalent to SDR 166.50 million (about US$225.08 million). (See Press Release No. 96/7.) The augmentation, which brings total financial support to SDR 172.05 million (about US$232.58 million), is to assist in offsetting the adverse impact on the balance of payments stemming from the Russian crisis. Today's decision was made in conjunction with completion of the midterm review, which triggers release of an amount equivalent to SDR 33.30 million (about US$45.02 million) on August 6, 1999.

In commenting on the Executive Board discussion on Georgia, Shigemitsu Sugisaki, Deputy Managing Director of the IMF, said:

"Executive Directors recognized the very difficult challenges facing the Georgian authorities and their efforts to strengthen policies. Nevertheless, they considered that greater adjustment efforts were indispensable. They stressed that, in order to achieve lasting financial stability, determined efforts were needed to bring revenues to a level at which expenditure commitments could be covered.

"Directors noted that, despite significant earlier achievements, progress in raising revenue collection had stalled over the past two years. Although Directors welcomed the recent revenue-enhancing measures, they strongly emphasized that much more needed to be done to ensure that these measures were effectively implemented. In particular the authorities were encouraged to raise petroleum taxation, tackle vested interests, and take vigorous actions against delinquent taxpayers. Directors expressed serious concern about the large stock of expenditure arrears. They noted the importance of timely payment of wages, pensions, and social expenditures in alleviating the hardship experienced by the poorer segments of society.

"Directors supported the authorities' commitment to a prudent monetary policy and considered that their adoption of a floating exchange rate regime had been appropriate. They welcomed the National Bank of Georgia's efforts to strengthen the banking system.

"Directors stressed the importance of an orderly servicing of Georgia's substantial external debt . They regretted the limited progress so far in discussions on Georgia's debt to Turkmenistan and strongly emphasized the need for an early resolution of this long-standing issue.

"Regarding structural measures, Directors commended the authorities for the privatization of Telasi and hoped that they could build on this success by privatizing other large firms. Directors also welcomed the authorities' recognition of the need to improve governance and the recent progress in judicial reform."


Program Summary

Georgia faced adverse internal and external factors that have made implementation of its economic program2 more difficult over the past year. The Russian crisis had a direct adverse impact on the economy and magnified large underlying internal and external imbalances. Real GDP growth in 1998 was estimated at 2.9% compared with the program target of 10%. A severe drought significantly lowered agricultural output and the output of hydroelectric plants, diminishing the availability of electricity for industrial users. The Russian crisis had a marked impact on the tradable goods sector and disrupted the payment system between the two countries. The volume of exports declined by about 3% in 1998. Exports to Russia, which accounted for about 30% of total Georgian exports prior to the crisis, declined to about 21% for 1998, following a sharp decline in the last quarter of the year. In addition, remittances from Georgians employed abroad fell significantly in the latter part of the year.

Overall price and output developments in 1998 were favorable, notwithstanding the negative effects of the Russian crisis. The 12-month inflation rate through end-November 1998 was negative, at about -1%, reflecting increased competition in the tradable goods sector as the domestic currency appreciated in real effective terms. Price developments in December, however, were effected by inflationary expectations following the authorities' decision to cease central bank intervention in the foreign exchange market. The 12-month inflation rate through end-December 1998 was 10.6% compared with the programmed rate of 6%.

Against the background of positive economic growth and low inflation for most of the year, the fiscal position did not improve as projected under the program. The fiscal deficit (commitment basis) amounted to 4.3% of GDP compared with a program target of 2% of GDP. Tax revenues in 1998 fell short of the program target, largely reflecting lax enforcement and the postponement of several revenue-raising measures.

Monetary developments were roughly in line with program projections through mid-August 1998, when there was a sharp decline in the demand for money stemming from both the emergence of the Russian crisis and budgetary problems. The National Bank of Georgia tightened monetary policy in September and allowed the lari to float, starting in December 1998.

The program's economic growth objective for 1999 is 2%, which is considered conservative given the depreciation of the lari and improved prospects for growth in tradable goods, and an expected increase in agricultural output. The end-of-period inflation objective is 13% for 1999, and international reserves are targeted at the equivalent of 2.5 months of imports. The key to achieving the program's macroeconomic objectives is a continuation of prudent monetary policy and a tightening of fiscal policy. Progress on structural reform and creating a level playing field for all economic agents, as well as respect for hard budget constraints, will be instrumental for increasing private sector investment and for boosting overall confidence in the management of the economy.

Georgia joined the IMF on May 5, 1992; its quota3 is SDR 150.30 million (about
US$203.18 million); its outstanding use of IMF credit currently totals SDR 205.12 million (about US$277.29 million).

Georgia: Selected Economic and Financial Indicators

  1995 1996 1997   1998
  Actual Actual Actual   Prog.   Prel. Act. Rev. Prog. 1

(Percentage change, unless otherwise indicated)
National income and prices                  
     Nominal GDP 169 55 19   17   6   21
     GDP at constant prices 2.4 10.5 11.0   10.0   2.9   2.0
     Consumer price index, period
162.7 39.4 7.1   6.5   3.6   22.2
     Consumer price index, end-period 57.4 13.7 7.3   6.0   10.6   12.9
External sector 2                  
     Exports -5 15 18   21   -4   5
     Imports -6 10 37   15   11   -12
Money, credit, and interest rates (end
     Reserve money 275 36 33   12   -6   9
     Credit to enterprises and households
         (banking system) 3
39 -15 38   41   38 4 21
     Broad money (including forex
135 42 46   26   -1   17
     Velocity, level 5 20.5 22.3 18.2   16.9   19.6   20.2
     Money multiplier 1.17 1.23 1.35   1.52   1.42   1.53
Gross international reserves                  
     In months of imports of goods 2.7 2.5 2.0   2.3   1.2   2.5
     In millions of U.S. dollars 157 158 173   210   118   213
Exchange rate, lari per U.S. dollar
    (end-period) 6
1.23 1.27 1.30   ...   1.79   ...
(In percent of GDP, unless otherwise indicated)
General government                  
     Revenue (excluding grants) 5.1 8.0 9.6   11.6   10.2   10.4
     Tax revenue 7 4.6 7.2 8.6   10.3   8.9   9.9
     Tax revenue (in percent of current
43.9 55.6 65.9   81.6   64.5   85.4
     Expenditure 8 11.6 14.1 14.2   13.9   14.7   12.8
     Net lending 0.7 0.1 0.3   0.5   0.5   0.4
     Fiscal balance, cash basis -4.6 -4.7 -4.2   -2.9   -3.4   -3.0
     Fiscal balance, commitment basis -5.3 -4.9 -4.6   -2.0   -4.3   -1.8
External sector                  
     Trade balance -11.7 -7.7 -10.7   -9.1   -13.4   -12.0
     Current account balance                  
           Excluding transfers -14.0 -9.1 -10.9   -10.3   -11.9   -10.1
           Including transfers -7.5 -6.0 -7.2   -7.0   -7.9   -5.3

Sources: Georgian authorities; and IMF staff estimates.              
1 Based on the revised program discussed with the authorities in June 1999.
2 Goods only; in U.S. dollar terms.                  
3 The sharp fall in 1996 reflects the provision made for nonperforming loans from commercial banks, portfolio in the context of the bank restructuring program. Inclusive of this adjustment, credit to enterprises and households would have grown by about 30% in nominal terms during 1996.
4 The sharp increase in credit to enterprises and households for 1998 reflects, in part, the revaluation of foreign-exchange-denominated loans due to the significant depreciation of the exchange rate in December 1998. Exclusive of the exchange rate impact, the increase in the stock of credit to enterprises and households is 23%.
5 Annual GDP divided by end-period M3.
6 Lari replaced the Georgian coupon in September/October 1995, at a conversion rate of 1 lari/1 million coupon. This rate is used to convert coupons to lari for the period prior to September 1995.
7 Includes general government tax revenue and special state funds. The latter include the Pension, Employment, and Road Funds. Privatization revenue is excluded.
8 On a commitment basis, cash expenditures differ by the change in expenditure arrears.
9 First quarter of 1999.

1The 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% and are repayable over 10 years with a 5 ½-year grace period.
2Details of the program will be available via the IMF's website:
3A 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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