Public Information Notice: IMF Concludes Article IV Consultation with Georgia and Approves Third Annual ESAF Arrangement

September 11, 1998

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 27, 1998, the Executive Board concluded the Article IV consultation with Georgia1 and approved the third annual loan under the Enhanced Structural Adjustment Facility (ESAF)2.


During 1997 the Georgian economy grew by 11 percent, sustained by a rapid increase in agriculture and the services sector, while the average annual inflation rate continued its downwards path initiated in 1995 and reached single-digit levels of about 7 percent. The fiscal deficit (on a commitment basis) declined from 4.5 percent in 1996 to 4.1 percent in 1997, and the ratio of general government tax revenue to current expenditure increased from 56 percent to 66 percent, as tax administration measures, together with the introduction of a new tax code, boosted tax revenue. The current account deficit widened from 9 percent of GDP in 1996 to 10 percent in 1997, mainly reflecting a rapid growth in imports associated with the construction and refurbishment of the "early oil" pipeline connecting Azerbaijan to the Black Sea.

The conduct of monetary policy remained prudent in 1997, with the exchange rate remaining at about lari 1.3 per U.S. dollar and gross reserves of the National Bank of Georgia (NBG) increasing to US$173 million. Compliance with banking sector prudential regulation continued to improve in 1997, although at times, several small-and medium-size commercial banks had difficulties in meeting the reserve requirements and liquidity ratios in a timely manner. The authorities have recently strengthened the banking sector prudential regulations, and are taking a tough stance on the issue of problem banks. To that end the NBG has put forward a system of leading indicators to monitor such banks and trigger necessary action by the monetary authority, if deemed appropriate.

The implementation of the government’s structural reform program moved forward in 1997. Privatization of medium- and large-scale enterprises accelerated in the second half of the year. Energy sector reform also advanced as the authorities enacted the Electricity Law, which set new parameters for government’s involvement in the sector and the establishment of a competitive market for electricity distribution and generation over the coming years. Agricultural land privatization made further progress with the distribution of about 60 percent of cultivated land to private farmers by end-1997. Public expenditure control improved with the treasury system expanding to cover almost all central government spending units and the Pension Fund.

Following extensive discussions with IMF staff, the Georgian authorities enacted a number of prior actions for a program that could be supported by a third annual ESAF arrangement covering the period May 1998/April 1999. The prior actions under the program included, inter alia, eliminating the remaining export restrictions on logs and scrap metal; dealing with problem banks; and electing the Board of Directors of the NBG.

The 1998 program embraces an important fiscal effort (equivalent to 2.5 percent of GDP on an annual basis) consisting of various revenue raising measures and cuts in expenditure appropriations included in the 1998 budget. As in the last two years, the program aims at increasing tax collections. The program also targets the elimination of all outstanding government expenditure arrears by end-1998 and a reduction in tax arrears from an equivalent of 30 percent of general government tax revenue at end-1997 to 15 percent by end-1998. Monetary policy will remain tight, with central bank financing of the budget declining sharply with respect to 1997. Gross international reserves are targeted at US$210 million by end-1998.

Structural reform will move forward in 1998, mainly in the areas of privatization of urban and industrial land and large-scale enterprises, financial sector reform, energy sector restructuring, and civil service reform.

Executive Board Assessment

Directors observed that the Georgian authorities have made major efforts to stabilize the economy and implement structural reform during the past three years. Key ingredients in the authorities’ economic program have been efforts to increase tax collection and reduce the overall fiscal deficit, complemented by a prudent monetary policy. Systemic reform has also been critical for the success of the program. In particular, privatization of agricultural land andenterprises, coupled with banking, energy, and legal sector reform, has underpinned the authorities’ effort to establish a market economy in Georgia.

Executive Directors noted that, despite the important strides made thus far, Georgia still faces daunting economic challenges that need attention in the short and long run. Directors stressed that fiscal adjustment needed to be strengthened, and noted the urgent need to mobilize additional tax revenue in order to cover general government current expenditures and finance basic public investment projects. Directors were reassured by the authorities’ intention to continue to work toward broadening the tax base to cover sectors with large revenue potential to the budget; removing remaining tax exemptions; and establishing a fairer tax system in which domestic and foreign goods and services are taxed at the same rates. In this regard, Directors noted the potential to collect greater revenue from, inter alia, cigarette excise duties, and expressed regret that the agricultural sector remained exempt from taxation in 1998.

Directors welcomed the authorities’ intention to eliminate all outstanding government expenditure arrears and avoid the accumulation of any new arrears during the program period. They were also encouraged by the authorities’ decision to tackle the issue of tax arrears, improve the targeting of the social safety net, increase budgetary allocations for health and education, and further develop the treasury system of the Ministry of Finance, as all of these measures were critical components of a comprehensive approach to fiscal consolidation. Directors urged the authorities to strive for greater fiscal transparency.

Directors recommended the continuation of a prudent monetary policy for the program period, as this policy will be critical in supporting the stability of the exchange rate and achieving the program’s international reserves objectives. Regarding exchange rate policy, Executive Directors agreed that the stability of the nominal exchange rate had been fundamental in anchoring inflationary expectations, and thus in reducing inflation from hyperinflation levels in 1994 to single-digit levels in 1997–98. Nonetheless, they urged the authorities to keep the current exchange rate policy under constant review in view of the central bank’s still vulnerable external reserve position.

Executive Directors supported Georgia’s efforts to reform the domestic banking system and welcomed the steps taken to tighten banking sector prudential regulations and strengthen banking supervision. Resolute action by the supervisory authorities will be required to build a sound banking system, including the requirement that commercial banks’ reporting meet international accounting standards. As important first steps, Executive Directors welcomed the decisions to introduce le`ading indicators to monitor problem banks and raise banks’ capital requirements.

Directors stressed the importance of pressing ahead with the authorities’ structural reform program. The privatization of urban and industrial land, together with the planned consolidation of the government’s divestment strategy from the energy and other industrial sectors, were steps in the right direction. Judicial reform would also be fundamental for establishing a solid system of property rights in Georgia. Directors welcomed the elimination of the export ban on scrap metal and the prohibitive export license fee on logs, noting that establishment of a liberaltrade regime was paramount in ensuring an efficient allocation of resources and bringing about sustained economic growth.

Executive Directors commended the authorities for their efforts to improve the compilation of monetary and price statistics. However, they urged the authorities to improve the compilation of balance of payments and national accounts statistics.

Noting Georgia’s weak external position, Directors welcomed Georgia’s completion of debt rescheduling agreements on pre-1995 bilateral debt with all creditors. Directors took note of the recent contacts between Georgia and Turkmenistan regarding the rescheduling of principal payments falling due during 1998–99, and regretted that an agreement had not yet been reached. They urged the authorities to continue their efforts to reach an appropriate rescheduling agreement with Turkmenistan as soon as possible. In the exceptional circumstances of Georgia, the Executive Board was prepared to approve Georgia’s request for a third annual ESAF arrangement, notwithstanding the accumulation of external arrears to an official creditor during the program period. This approval reflected a judgment that strong efforts were being made to reach a rescheduling agreement, and that prompt support from the Fund was important to maintain the momentum of economic reform in Georgia and to strengthen the country’s debt-service capacity over the medium term. In making progress toward external viability, Directors discouraged Georgia from borrowing in the international capital market, given the existing onerous external debt burden, and noted the need to increase domestic saving. In this regard, Directors underscored the importance of fully implementing the policy measures the authorities have committed to under the ESAF.

Georgia: Selected Economic and Financial Indicators, 1994-98



  1994 1995 1996 1997 1998

  (Percentage change, unless otherwise indicated)
National income and prices  
GDP at constant prices -11 2 11 11 10
Consumer price index, period average 15,607 162.7 39.4 7.1 6.5
Consumer price index, end-period 6,474 57.4 13.7 7.3 6.0
Money, credit, and interest rates (end-period)  
Reserve money 2,480 275 36 33 12
Credit to enterprises and households (banking system) 1 3,663 39 -15 38 41
Broad money (including forex deposits) 2,342 135 42 46 26
Velocity, level 17.9 20.5 22.3 18.2 16.9
Money multiplier 1.87 1.17 1.23 1.35 1.52
Deposit interest rate (in percent; 3 month maturity) 49 15 14 11 ...
Lending interest rate (in percent; 3 month maturity) 115 66 51 49 ...
  (In percent of GDP, unless otherwise indicated)
General government  
Revenue (excluding grants) 4.2 5.1 8.1 10.0 12.1
Tax revenue 2 3.7 4.6 6.9 8.8 10.3
Tax revenue (in percent of current expenditure) 17.0 53.3 53.8 66.0 81.6
Expenditure 23.5 11.6 14.1 14.4 13.93
Net lending 0.7 0.7 -0.2 0.1 0.5
Fiscal balance, cash basis -7.4 -4.5 -4.4 -3.8 -2.5
Fiscal balance, commitment basis -16.5 -5.3 -4.5 -4.1 -1.5
External sector  
Trade balance -29.3 -11.7 -7.7 -9.2 -9.1
Current account balance  
Excluding official transfers -36.0 -14.1 -9.1 -10.2 -10.3
Including official transfers -22.4 -7.5 -6.1 -6.6 -7.0
Gross international reserves  
In months of imports of goods 0.7 2.7 2.5 2.2 2.3
In millions of US$ 41 157 158 173 210
Exchange rate, lari per US$ (end-period) 4 1.28 1.23 1.27 1.30 ...

Sources: Georgian authorities; and IMF staff estimates.

1The sharp fall in 1996, reflects the provision made for non-performing 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 percent in nominal terms during 1996.
2Includes general government tax revenue and special state funds. The latter include the Pension, Employment, and Road Funds. Privatization revenue is excluded.
3For 1998, excludes the programmed reduction of lari 70 million in expenditure arrears. Inclusive of this reduction in expenditure arrears, total expenditure in 1998 (excluding net lending) would amount to 14.7 percent of GDP.
4Lari 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.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.

2 See Press Release No. 98/33 of the International Monetary Fund regarding the Executive Board approval of the third annual ESAF arrangement.


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