Georgia: Concluding Statement of an IMF Staff Visit

March 4, 2015

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.

March 4, 2015

An International Monetary Fund (IMF) mission led by Mr. Mark Griffiths visited Tbilisi February 23-March 4, 2015 to assess the impact from developments in neighboring countries on Georgia’s economy and how best to overcome these new challenges. The mission met with Prime Minister Irakli Garibashvili, Deputy Prime Minister Giorgi Kvirikashvili, Finance Minister Nodar Khaduri, Governor Giorgi Kadagidze, other Georgian officials, representatives of the international community, civil society, and the private sector. At the end of the mission, Mr. Griffiths issued the following statement:

Georgia’s economy has been hit by a combination of severe external shocks: the Russia-Ukraine crisis, the deepening recession in Russia (both of which create ripple-effects through the region) and currency devaluations in trading partner countries. Because of these shocks, Georgia’s exports are 30 percent lower than one year ago, and remittances from Georgian workers abroad are down 25 percent.

The economy is slowing as a result. In January, output grew by only 0.5 percent compared to one year ago. While growth this year could reach 2 percent, this projection is subject to risks. The economies of many of Georgia’s main trading partners are slowing by even more, and the depreciation of their exchange rates is hurting Georgia’s competitiveness.

Lower exports, remittances, and tourism receipts have increased the current account deficit in 2014 to around 9.5 percent of GDP. Because foreign earnings are lower, the Lari has depreciated by more than 20 percent against the US dollar since January 2014. Although this depreciation is large, it is in line with the depreciation experienced by many other countries, given the strength of the US dollar. Indeed, most currencies in the region have depreciated by even more. That said, the Lari’s depreciation against the US dollar will increase costs for those who have borrowed in foreign currency. This will slow down economic growth.

Because of the depreciation, inflation will likely pick up somewhat in coming months, towards the National Bank of Georgia’s (NBG) inflation target of 5 percent. But this increase in inflation will take place from a low starting point: inflation in February was only 1.3 percent, in part because of lower oil prices. Lower import prices should also contain inflation.

The government and the NBG need to work together now—in a way that respects each other’s areas of responsibility and central bank independence—on a comprehensive action plan to address these new challenges. Because of its solid fundamentals, reform-minded authorities, and the Association Agreement with the EU, Georgia is well placed to overcome the current challenges.

The government deserves credit for keeping the budget deficit to 3 percent of GDP in 2014, well below the program target. However, for 2015, lower growth means that tax revenues will be less than projected in the budget. The government will therefore need to take measures to keep the budget deficit under control. The government has appropriately taken steps in this direction, including by limiting employee bonuses and by taking efforts to contain administrative spending. The government needs to build on these decisions and pass amendments to the budget that include specific tax increases and spending cuts to limit the increase in the budget deficit. However, spending on the social safety net should be maintained and targeting improved 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. The main objective of the NBG is to ensure price stability: achieving this goal depends on having a floating exchange rate. In addition, the floating rate allows the exchange rate to absorb external shocks. Intervening to resist shocks that will likely be long-lasting would only waste Georgia’s foreign currency reserves and slow the reduction of Georgia’s trade deficit with the rest of the world.

Independence of the NBG should be preserved and respected, so that it is free to pursue its main objective of price stability, and to make sure that the financial sector stays healthy, which will support long-term, stable economic growth.

Finally, we look forward to plans to accelerate reforms to make Georgia a more attractive place for doing business and for investing, for creating jobs, and for boosting growth in the future. These should include easing recent restrictions on foreign businesses, seeking out new private investment, boosting saving through pension and capital market reforms, and raising educational standards.

The mission would like to thank the government and the NBG for productive discussions. We look forward for the government to prepare specific amendments to the budget that will limit the budget deficit, and for the authorities to continue adhering to their floating exchange rate policy. We hope that these steps will be taken quickly, so that the IMF mission can return soon to Georgia for the Second Review.


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