Georgia: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, July 19, 2021
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- Published: July 19, 2021
Overview
- The COVID-19 crisis caused a sharp contraction with the economy shrinking by 6.2 percent in 2020 and 4.5 percent in the first quarter of 2021.
- Substantial support measures protected vulnerable households and businesses; donor support was sizeable.
- Recovery gained momentum with growth expected to reach 7.7 percent for 2021, implying output will exceed its 2019 level in 2021.
- Key policy priorities: controlling the pandemic; securing macroeconomic stability; ensuring a durable and inclusive recovery; unwinding crisis support measures; reducing deficit and debt anchored by the fiscal rule; preserving financial-sector resilience; and advancing structural reforms.
Recent developments and outlook
- Findings:
- Mobility restrictions and a slowdown in tourism drove the largest output contraction since the 1990s.
- Poverty and unemployment rose, reversing much recent progress.
- COVID-19 case numbers are well below peak and most restrictions have been removed.
- Monthly estimates point to a strong rebound in Q2 2021, supporting an upgraded 2021 growth projection of 7.7 percent.
- Inflation accelerated to 9.9 percent year-on-year in June, largely reflecting utility price increases, higher commodity prices, and elevated input costs.
- High inflation is expected through the end of the year, before declining rapidly in 2022 as temporary effects fade.
- Downside risks and uncertainties:
- New COVID-19 variants or vaccination delays could require new lockdowns and reduce external demand.
- Vaccinations must accelerate substantially to ensure that more than half of the population is vaccinated by the end of the year.
- Renewed political uncertainty could increase lari volatility and undermine investment and confidence.
- Underlying vulnerabilities include high dollarization and foreign currency-denominated debt.
Fiscal policy
- Recommendations and assessment:
- As recovery proceeds, fiscal policy should shift toward unwinding crisis support measures and bringing down the deficit and debt.
- The fiscal rule has been an essential anchor; authorities’ strong commitment to the fiscal rule is welcome.
- The faster-than-expected recovery has substantially improved the revenue outlook for 2021.
- In the planned supplementary budget, new revenues will largely finance additional healthcare costs as well as capital and other spending, but saving more of these revenues would help speed fiscal consolidation needed to comply with the fiscal rule by 2023.
- Further revenue windfalls should be saved.
- The eventual unwinding of COVID-19 support measures will help shrink the deficit, but additional adjustment will still be needed.
- Faster deficit reduction in the 2022 budget would better balance over the next two years the need for new revenue or saving measures.
- Fiscal risks and strengthening the framework:
- Ambitious capital spending plans; rising current spending pressures (education, pension, health); fiscal risks from SOEs and power purchase agreements could increase adjustment needs.
- Strengthen public investment management to boost efficiency of capital spending.
- To contain power sector fiscal risks, specify clear criteria in advance for any deviations from the feed-in premium scheme.
- Consider a comprehensive review of tax expenditures and further strengthen tax administration to generate additional revenue.
- Continue to advance efforts to manage and mitigate risks based on successive Fiscal Risk Statements.
- Comprehensive reform of SOE governance is essential.
Monetary policy
- Recommendations and assessment:
- Monetary policy should guard against temporarily high inflation becoming entrenched.
- The mission welcomes the NBG’s rate increases in March and April to help ensure temporary commodity price and supply effects remain transient and inflation expectations stay anchored around the 3 percent target.
- With recovery faster than expected and risks to inflation tilted to the upside, the NBG should be ready to promptly hike rates further if inflation expectations or core inflation suggest high inflation risks becoming entrenched.
- The inflation targeting framework and floating exchange rate regime remain appropriate.
- Given risks including financial dollarization, continue prudent use of foreign exchange interventions to prevent disorderly market conditions.
- The recent introduction of differentiated reserve requirements on foreign exchange liabilities of banks could be useful to reduce deposit dollarization.
Financial sector policies
- Assessment of resilience:
- The NBG’s prudential supervision before the crisis and decisive actions afterwards contributed to financial sector resilience.
- Recent steps include upgrading banks’ prudential requirements in line with the Basel III framework; introducing responsible lending regulations; and comprehensive measures to address foreign exchange-related financial stability risks, which helped reduce dollarization in banks over time.
- Fiscal support measures, expanded liquidity provision, required significant up-front general provisions, and temporary easing of some capital requirements helped cushion the pandemic’s impact.
- Stress tests and buffers:
- Stress tests in the recent FSAP confirmed banks have sufficient capital to absorb credit losses under a conservative baseline scenario over the next three years.
- Under the stress scenario of an extended pandemic and adverse external financial environment, capital shortfalls are not deemed substantial and are assessed to be manageable from a systemic perspective.
- The FSAP found banks are sufficiently liquid, including in a stressed scenario of high deposit withdrawals.
- Policy recommendations:
- Ask banks to preserve sufficient retained earnings until significant downside risks recede.
- Identify effective ways to resolve non-performing loans, which appear to be falling from a peak of 8.5 percent in March 2021 and have been significantly provisioned.
- Medium-term priorities from the FSAP: implement Basel regulations on banks’ large exposures as planned; formalize and enhance supervisory processes; develop a prompt corrective action framework for banks; and take steps to be able to swiftly implement a bridge bank if needed.
Structural policies
- Priorities:
- Reinvigorate structural reforms to enhance growth and inclusiveness.
- Implement the recently adopted insolvency framework and train insolvency professionals to facilitate resource reallocation.
- Address high unemployment and inequality that were exacerbated by COVID-19.
- Improve education and vocational training to address skills mismatches.
- Review the social protection system and strengthen active labor market policies to tackle entrenched unemployment.
- Judiciary reform is important to strengthen the business environment.
Selected economic and financial indicators, 2019-2022 (highlights)
- Real GDP (annual percentage change): 5.0 (2019); -6.2 (2020); 3.5 (2021 Country Report 21/79 projection); 7.7 (2021 staff projection); 5.8 (2022 projection).
- Nominal GDP (in billions of laris): 49.3 (2019); 49.4 (2020); 53.3 (2021 Country Report 21/79); 56.9 (2021 staff); 63.3 (2022).
- GDP per capita (in thousands of U.S. dollars): 4.7 (2019); 4.3 (2020); 4.4 (2021 Country Report 21/79); 5.3 (2021 staff).
- CPI, Period average: 4.9 (2019); 5.2 (2020); 3.8 (2021 Country Report 21/79); 7.3 (2021 staff); 2.8 (2022).
- CPI, End-of-period: 7.0 (2019); 2.4 (2020); 9.4 (2021 Country Report 21/79); 2.3 (2021 staff).
- Consolidated government operations (in percent of GDP):
- Revenue and grants: 27.1 (2019); 25.1 (2020); 25.2 (2021 Country Report 21/79); 25.8 (2021 staff); 26.2 (2022).
- o.w. Tax revenue: 23.7 (2019); 22.2 (2020); 22.6 (2021 Country Report 21/79); 22.9 (2021 staff).
- Expenditures: 28.9 (2019); 34.4 (2020); 32.6 (2021 Country Report 21/79); 30.3 (2021 staff).
- Expense: 21.4 (2019); 25.3 (2020); 23.2 (2021 Country Report 21/79).
- Net acquisition of non-financial assets: 7.6 (2019); 8.1 (2020); 7.4 (2021 Country Report 21/79); 7.2 (2021 staff).
- Capital spending: 8.0 (2019); 8.6 (2020); 7.9 (2021 Country Report 21/79); 7.5 (2021 staff).
- Privatization proceeds: -0.4 (2019); -0.5 (2020); -0.8 (2021 Country Report 21/79).
- Net Lending/Borrowing (GFSM 2001): -1.8 (2019); -9.2 (2020); -7.4 (2021 Country Report 21/79); -6.8 (2021 staff); -4.1 (2022).
- Budget lending: 0.2 (2019); 0.1 (2020); 0.3 (2021 Country Report 21/79).
- Augmented Net lending / borrowing (EFF definition)2/: -2.1 (2019); -9.3 (2020); -7.6 (2021 Country Report 21/79); -6.9 (2021 staff); -4.4 (2022).
- General government debt3/: 40.4 (2019); 60.0 (2020); 60.8 (2021 Country Report 21/79); 55.3 (2021 staff); 54.3 (2022).
- o.w. Foreign-currency denominated: 32.0 (2019); 47.5 (2020); 49.6 (2021 Country Report 21/79); 44.8 (2021 staff); 42.0 (2022).
- Credit growth:
- Credit to the private sector: 20.7 (2019); 22.4 (2020); 6.4 (2021 Country Report 21/79); 13.3 (2021 staff); 10.8 (2022).
- In constant exchange rate: 16.1 (2019); 9.0 (2020); 5.5 (2021 Country Report 21/79); 15.4 (2021 staff); 9.5 (2022).
- Broad money: 17.6 (2019); 24.6 (2020); 16.9 (2021 Country Report 21/79); 14.1 (2021 staff); 17.1 (2022).
- External sector (in percent of GDP unless otherwise indicated):
- Current account balance: -5.5 (2019); -12.5 (2020); -10.9 (2021 Country Report 21/79); -9.9 (2021 staff); -7.5 (2022).
- Gross international reserves (billions of US$)4/: 3.9 (2019); 3.6 (2020); 4.1 (2021 staff).
- In percent of IMF Composite measure (floating): 98.3 (2019); 107.6 (2020); 97.8 (2021 Country Report 21/79); 99.0 (2021 staff); 99.4 (2022).
- Gross external debt: 106.6 (2019); 129.5 (2020); 133.9 (2021 Country Report 21/79); 118.4 (2021 staff); 111.6 (2022).
Source: Georgia: Staff Concluding Statement of the 2021 Article IV Mission, July 19, 2021, IMF Communications Department.
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