Georgia: Concluding Statement of an IMF Staff Visit

IMF News, March 4, 2015

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Georgia’s economy has been hit by a combination of severe external shocks: the Russia-Ukraine crisis, the deepening recession in Russia, and currency devaluations in trading partner countries.
Exports are 30 percent lower than one year ago.
Remittances from Georgian workers abroad are down 25 percent.
Output growth: in January, output grew by only 0.5 percent compared to one year ago.
Growth projection: while growth this year could reach 2 percent, this projection is subject to risks from slower trading-partner economies and their exchange rate depreciation.

The current account deficit in 2014 increased to around 9.5 percent of GDP.
The Lari has depreciated by more than 20 percent against the US dollar since January 2014.
Most regional currencies have depreciated by even more; the Lari depreciation will increase costs for borrowers with foreign-currency debt and will slow economic growth.
Lower oil and import prices should contain inflationary pressures despite depreciation.

National Bank of Georgia (NBG) inflation target: 5 percent.
Inflation in February was 1.3 percent.
Because of the depreciation, inflation will likely pick up somewhat in coming months towards the 5 percent target, but from a low starting point partly due to lower oil prices.

The government kept the budget deficit to 3 percent of GDP in 2014, well below the program target.
For 2015, lower growth implies tax revenues will be less than projected in the budget.
The government has limited employee bonuses and taken efforts to contain administrative spending.
Policy recommendations:
- Build on existing decisions and pass amendments to the budget that include specific tax increases and spending cuts to limit the increase in the budget deficit.
- Maintain spending on the social safety net and improve targeting to protect the vulnerable and the poor.

The mission fully supports the NBG’s policy to refrain from intervening in the foreign exchange market and to allow the Lari to float.
Rationale:
- The NBG’s main objective is price stability; achieving this goal depends on having a floating exchange rate.
- A floating rate allows the exchange rate to absorb external shocks.
- Intervening to resist likely long-lasting shocks would waste foreign currency reserves and slow the reduction of Georgia’s trade deficit.
Independence of the NBG should be preserved and respected so it can pursue price stability and ensure a healthy financial sector.

Georgia’s solid fundamentals, reform-minded authorities, and the Association Agreement with the EU position the country to overcome current challenges.
Recommended reforms to accelerate growth and attract investment:
- Ease recent restrictions on foreign businesses.
- Seek out new private investment.
- Boost saving through pension and capital market reforms.
- Raise educational standards.

The mission looks forward to the government preparing specific amendments to the budget that will limit the budget deficit.
The mission expects the authorities to continue adhering to their floating exchange rate policy.
The mission hopes these steps will be taken quickly so that the IMF mission can return soon to Georgia for the Second Review.

Mission Concluding Statement — March 4, 2015