IMF Staff Concludes Virtual Review Mission to Georgia

IMF News, November 10, 2020

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IMF staff led by Mercedes Vera Martin conducted virtual discussions from October 5 to November 9, 2020, on the Seventh Review under the Extended Fund Facility (EFF) arrangement.
Georgian authorities and the IMF team reached a staff-level agreement on the conclusion of the Seventh Review of the EFF arrangement.
The agreement is subject to approval by IMF management and the Executive Board; consideration by the Executive Board is expected in December 2020.
Completion of the review will make SDR79 million (about $112.1 million) available to Georgia, bringing total disbursements under the EFF arrangement to SDR406 million (about $576.4 million).

The COVID-19 pandemic is expected to cause a contraction of 5 percent in GDP in 2020, one percentage point greater than projected at the time of the Sixth Review.
End-2020 inflation is projected at 3.5 percent.
The current account deficit is expected to widen to 9.7 percent of GDP in 2020, from 5.4 percent in 2019.
High remittances and lower imports have contained external financing needs; gross international reserves remain at comfortable levels due to the IMF augmentation and donor financing.
The fiscal deficit is expected to widen in 2020 due to lower tax revenues and fiscal support measures.
Preliminary data suggest a tentative recovery in domestic demand began in June 2020.
Growth in credit to the private sector has remained robust, partly supported by government subsidies on lari-denominated mortgages.
Recent combination of demand slack and post-lockdown supply recovery have put downward pressure on inflation.

Key near- and medium-term projections:

GDP contraction in 2020: 5 percent.
GDP growth in 2021: rebound to 4.3 percent.
Revision in 2021 growth outlook (from 5 percent at the October 2020 WEO) attributed to regional conflict uncertainty and increased COVID-19 cases in Georgia.
Inflation expected to converge to the 3-percent target by end-2021.
Medium-term growth projected at 5¼ percent, supported by infrastructure spending and structural reforms.
Tourism receipts assumed to recover to 2019 levels only by 2024.
Current account deficit projected at 5.5 percent of GDP by 2025, financed predominantly by FDI.

The National Bank of Georgia (NBG) provided lari and dollar liquidity and coordinated with the Ministry of Finance for long-term lari liquidity provision.
The NBG reduced its policy rate by a cumulative 100 basis points since April 2020 and has maintained rates steady since August 2020.
Staff supports the current monetary stance, recommending it be maintained until clear signs show inflation remains on a downward trend in the context of recent lari depreciation.
Warning: keeping inflationary expectations anchored may call for tightening monetary policy should pressures on the lari exchange rate feed into expectations.
Banks have been generally resilient due to sound initial capital and liquidity positions and NBG support.
Staff welcomes the NBG’s proactive monitoring of asset quality and urges further progress in implementing the resolution framework.

The easing of the fiscal stance in 2020 appropriately supported economic activity and protected jobs.
Fiscal support measures included wage subsidies, cash transfers to households (including those in the informal sector), expanded social transfers, and temporary tax reliefs for businesses.
Smoother budget execution helped accelerate public investment and VAT refunds.
Fiscal deficit projected to reach 8.7 percent of GDP in 2020.
2021 Budget projects a deficit of 7.6 percent of GDP, including higher healthcare spending and measures to support households and businesses.
Authorities committed to medium-term fiscal sustainability as directed by Georgia’s fiscal rule, aiming to bring the fiscal deficit under 3 percent of GDP and public debt under 60 percent of GDP by 2023.
Authorities continue to monitor fiscal risks associated with energy purchasing power agreements and state-owned enterprises.

Advancing the structural reform agenda is essential to support recovery, limit economic scarring, and achieve stronger, resilient, and more inclusive growth.
Policy priorities and reforms highlighted:
- Enhancing connectivity.
- Facilitating access to finance.
- Advancing the education reform.
- Implementing the recently approved corporate insolvency framework.
- Reforming state-owned enterprises to create conditions for a more efficient public sector and boost private sector development.

The IMF team expressed solidarity with all Georgians impacted by the health crisis and thanked the authorities, international development partners, and private sector representatives for open and constructive discussions.

IMF Staff Concludes Virtual Review Mission to Georgia — Press Release No. 20/336, November 10, 2020

Press Release-English
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- Press Release-English (PDF)