Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Georgia
IMF News, March 27, 2009
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- Published: March 27, 2009
Background
- Executive Board concluded the Article IV consultation with Georgia on March 23, 2009.1
- Combined shocks: August 2008 armed conflict and the global crisis led to:
- Real GDP growth decline from 12½ percent in 2007 to an estimated 2 percent in 2008, after a sharp contraction in the second half of the year.
- Inflation slowed to 5½ percent at end-2008 as global food and energy prices receded and demand weakened.
- External current account deficit estimated at 22½ percent of GDP in 2008 but narrowed substantially in the second half of the year.
- Private capital inflows dropped from $1.7 billion during the first half of the year to an estimated $450 million during the second half.
- Gross official reserves fell immediately after the conflict but recovered later, aided by:
- donor support,
- borrowing from the Fund under the Stand-By Arrangement approved last September,
- transfers from the sovereign wealth funds to government accounts in the central bank.
- Fiscal and monetary developments:
- Fiscal deficit widened markedly in 2008; composition of spending shifted from high defense and election outlays in the first half to infrastructure and social spending in the second half.
- Monetary policy had focused on resisting inflationary pressures until the conflict, then faced declining demand for local currency and bank liquidity issues.
- Central bank intervened heavily in the foreign exchange market to support the lari.
- Banks stopped new lending despite central bank liquidity injections, reduced reserve requirements and policy rate cuts.
- Banking sector vulnerabilities:
- Tightening of credit conditions and economic weakening exposed liquidity and solvency deterioration.
- Nonperforming loans increased sharply; need for loan-loss provisioning, higher funding costs and lost interest income affected profitability.
- Structural reforms in early 2008:
- Gradual reduction of income and dividend taxes.
- Introduction of rules to guide fiscal and monetary policies in the medium term while ensuring public sector discipline and price stability.
Executive Board Assessment — Findings and Risks
- Directors observed that the Georgian economy was seriously affected by the August 2008 armed conflict and the global downturn.
- Directors judged combined shocks to the current and capital accounts likely to be larger and more prolonged than originally expected, increasing external adjustment challenges and diminishing near-term growth prospects.
- Directors endorsed the authorities’ economic strategy:
- Fiscal policy to support domestic demand.
- Exchange rate flexibility to achieve external stability.
- Structural reforms to secure sustained economic growth over the medium term.
- Directors saw considerable downside risks to the economic outlook and recommended readiness to adapt policies as warranted.
- Support for authorities’ plans:
- Contain slowdown through a donor-financed fiscal stimulus and reorientation of expenditures.
- Authorities reduced targeted 2009 fiscal deficit in line with a downward revision in expected official external financing.
- Expenditure switched from imported defense goods toward essential productivity-enhancing infrastructure investment and better targeted social spending.
- Directors welcomed planned expenditure management reforms.
- Exchange rate and reserves:
- Move to foreign exchange auctions welcomed as important for greater exchange rate flexibility and protecting international reserves, which are relatively low.
- Agreed exchange rate flexibility needed to be managed to preserve confidence in the financial sector.
- Directors took note of the staff assessment that the real effective exchange rate is overvalued.
- Over the medium term, commitment to exchange rate flexibility and structural reforms should help correct the overvaluation and reduce vulnerabilities from the large underlying current account deficit.
- Monetary policy and liquidity management:
- Recommended all instruments of monetary policy, including the interest rate and reserve requirements, be employed to support more cautious liquidity management and ease pressures on the foreign exchange market.
- Welcomed planned improvement of the central bank’s liquidity framework to strengthen effectiveness of interest rate policy.
- Stressed importance of closely coordinating fiscal and monetary policies to contain pressures in the foreign exchange market.
- Financial sector stability:
- Close supervision emphasized given deterioration in banks’ loan portfolios and profitability.
- Welcomed Financial Supervisory Agency’s actions to increase provisioning based on bank-by-bank assessments.
- Noted upcoming technical assistance from the Fund to strengthen stress-testing capability.
- Endorsed authorities’ measures to bolster depositor confidence through increased transparency and adequate safety nets.
- Welcomed authorities’ commitment to developing a financial stability plan to respond to potential situations of stress.
Key Statistics — Georgia: Selected Economic Indicators, 2004–2008
- Real Sector
- Real GDP growth (percentage change): 2004: 5.9; 2005: 9.6; 2006: 9.4; 2007: 12.4; 2008: 2.0
- GDP (in millions of U.S. dollars): 2004: 5,126; 2005: 6,411; 2006: 7,768; 2007: 10,227; 2008: 12,870
- GDP per capita (in U.S. dollars): 2004: 1,188; 2005: 1,486; 2006: 1,800; 2007: 2,324; 2008: 2,925
- Inflation (in percent) — Period average: 2004: 5.7; 2005: 8.3; 2006: 9.2; 2007: 10.0; 2008: (no period-average value listed)
- Inflation (in percent) — End-of-period: 2004: 7.5; 2005: 6.2; 2006: 8.8; 2007: 11.0; 2008: 5.5
- Central government operations (in percent of GDP)
- Revenue and grants: 2004: 23.1; 2005: 24.4; 2006: 26.7; 2007: 29.3; 2008: 30.7
- Expenditure and net lending: 2004: 20.7; 2005: 26.0; 2006: 29.7; 2007: 34.0; 2008: 37.1
- Overall balance (cash basis): 2004: 2.4; 2005: -1.6; 2006: -3.0; 2007: -4.7; 2008: -6.4
- Monetary indicators
- Reserve money (end-of-period growth rate, in percent): 2004: 44.3; 2005: 19.7; 2006: 19.2; 2007: 25.6; 2008: -4.5
- Broad money (end-of-period growth rate, in percent): 2004: 42.6; 2005: 26.4; 2006: 39.3; 2007: 49.6; 2008: 7.0
- Broad money velocity: 2004: 7.64; 2005: 6.79; 2006: 5.18; 2007: 4.27; 2008: 4.48
- External Sector
- Current account balance (including transfers) — In millions of U.S. dollars: 2004: -344; 2005: -701; 2006: -1,174; 2007: -2,006; 2008: -2,911
- Current account balance (including transfers) — In percent of GDP: 2004: -6.7; 2005: -10.9; 2006: -15.1; 2007: -19.6; 2008: -22.6
- External debt (in millions of U.S. dollars): 2004: 2,138; 2005: 2,095; 2006: 2,328; 2007: 3,136; 2008: 4,581
- External debt (in percent of exports of goods and services): 2004: 41.7; 2005: 32.7; 2006: 30.0; 2007: 35.6; 2008: (no value listed)
- Gross official international reserves (in millions of U.S. dollars): 2004: 352; 2005: 474; 2006: 881; 2007: 1,361; 2008: 1,480
- Gross official international reserves (in months of imports of goods and services): 2004: 1.3; 2005: 1.8; 2006: 2.2; 2007: 3.0; 2008: (no value listed)
- Exchange rate, lari/dollar, period average: 2004: 1.92; 2005: 1.81; 2006: 1.78; 2007: 1.66; 2008: 1.48
Source: Public Information Notice (PIN) No. 09/37, March 27, 2009.