IMF Executive Board Concludes 2021 Article IV Consultation with Georgia

IMF News, September 21, 2021

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IMF Executive Board Concludes 2021 Article IV Consultation with Georgia

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Bibliographic details

• Published: September 21, 2021

Overview and context

• Press Release No. 21/270; Washington, DC; September 21, 2021.
• The Executive Board concluded the Article IV consultation with Georgia on September 15, 2021. The consultation also included discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for Georgia.
• The COVID-19 crisis caused the largest output contraction since the 1990s: the economy shrank by 6.2 percent in 2020. Poverty and unemployment rose, reversing much recent progress.
• Authorities’ response: strengthened healthcare, substantial assistance to vulnerable households and businesses, and sizeable donor support. COVID-19 cases rose sharply in August before declining; vaccinations have accelerated.

Recent performance and near-term outlook

• Recovery momentum and growth:
  • Growth now expected to reach 7.7 percent in 2021 (a significant upgrade from earlier expectations), implying output will exceed its 2019 level in 2021.
  • Drivers: robust growth in remittances and exports, early signs of a faster-than-expected rebound in tourism.
  • Current account deficit expected to narrow compared to its elevated 2020 level.
• Inflation:
  • Inflation accelerated to 12.8 percent year-on-year in August 2021, largely reflecting utility price increases, higher commodity and food prices, and elevated input costs.
  • Inflation is expected to decline rapidly in 2022 as these temporary effects fade.
• Risks:
  • Significant and elevated uncertainty. Chief risk: COVID-19 variants or vaccination delays that could require new lockdowns and reduce external demand, potentially derailing the recovery.

Financial sector and FSAP findings

• FSAP conclusions:
  • Recent regulatory reforms and policy actions following the COVID-19 shock have helped support financial sector resilience.
  • Strong pre-pandemic bank capital and liquidity buffers and profitability contributed to resilience.
• Macroprudential and supervisory assessment:
  • Authorities’ macroprudential toolkit is comprehensive and includes measures to address high dollarization, which complicates monetary policy and exposes banks to credit risk from exchange rate shocks.
  • Measures aim to limit bank risks and reduce incentives for lending in foreign currency.
  • Recommendation: over the medium term, consider tightening de-dollarization measures gradually, with choice and calibration informed by impact assessments.
  • Authorities follow a prudent supervisory approach with significant steps since the 2015 FSAP: adoption of Basel III, comprehensive update of legal and regulatory framework for banking resolution and crisis management.
  • Scope remains to formalize internal procedures, including for bank resolution and crisis management.
• Stress and capital:
  • FSAP finds banks have sufficient capital to absorb credit losses from the pandemic under a baseline scenario.
  • Capital shortfalls in possible stress scenarios are expected to remain manageable.
  • Recommendation: NBG should encourage banks to retain earnings until pandemic-related uncertainties subside and capital buffers are fully restored.
• Other supervisory recommendations:
  • Implement a prompt corrective action framework for banks and be ready to implement a bridge bank if needed.
  • Consideration of a central bank digital currency: plans for a controlled testing environment to uncover potential unintended consequences and economic and regulatory issues.
  • Need to address AML/CFT vulnerabilities.

Executive Board Assessment — key policy messages

• Health and recovery:
  • Directors emphasized sustaining a strong pace of vaccinations to bolster the recovery against pandemic risks.
• Fiscal policy:
  • Support for shifting fiscal policy toward bringing down the deficit and debt, anchored by Georgia’s fiscal rule.
  • Better-than-expected recovery has helped finance additional healthcare services; Directors stressed saving further windfalls to provide a buffer against risks.
  • Recommendations to expand fiscal space and reduce fiscal risks by:
  • reviewing tax expenditures;
  • strengthening tax administration and public investment management;
  • advancing SOE governance reform.
• Monetary and exchange-rate policy:
  • Directors welcomed recent monetary policy rate increases to help keep inflation expectations anchored.
  • With inflation risks tilted to the upside, Directors supported further rate hikes if high inflation shows signs of becoming entrenched.
  • Encouraged continued prudent use of foreign exchange intervention to prevent disorderly market conditions given risks from financial dollarization.
• Financial supervision and regulation:
  • Commended NBG’s prudent supervisory approach and pandemic actions.
  • Urged formalization of internal supervisory processes and continued strengthening of assessments of banks’ risk management and governance.
  • Any further tightening or recalibration of de-dollarization measures should be gradual and informed by thorough impact assessments.
• Structural reforms and inclusion:
  • Reinvigorating structural reforms is needed to sustain growth and make it more inclusive.
  • Urged actions to tackle high unemployment and inequality including:
  • education reforms;
  • a social protection review;
  • strengthened active labor market policies.
  • Welcomed implementation of the new insolvency framework and stressed continued structural fiscal and judiciary reforms to improve the business environment.

Selected economic and financial indicators, 2019-2022 (as reported)

• National accounts and prices (annual percentage change; unless otherwise indicated)
  • Real GDP: 5.0 (2019); -6.2 (2020); 3.5 (2021 Country Report 21/79 1/ projection); 7.7 (2021 projection); 5.8 (2022 projection)
  • Nominal GDP (in billions of laris): 49.3 (2019); 49.4 (2020); 53.3 (2021 Country Report 21/79 1/); 57.5 (2021 projection); 64.5 (2022 projection)
  • GDP per capita (in thousands of U.S. dollars): 4.7 (2019); 4.3 (2020); 4.4 (2021 Country Report 21/79 1/); 4.8 (2021 projection); 5.3 (2022 projection)
  • CPI, Period average: 4.9 (2019); 5.2 (2020); 3.8 (2021 Country Report 21/79 1/); 9.3 (2021 projection); 5.4 (2022 projection)
  • CPI, End-of-period: 7.0 (2019); 2.4 (2020); 13.1 (2021 Country Report 21/79 1/); 3.2 (2021 projection)
• Consolidated government operations (in percent of GDP)
  • Revenue and grants: 27.1 (2019); 25.1 (2020); 25.2 (2021 Country Report 21/79 1/); 25.7 (2021 projection); 26.1 (2022 projection)
  • o.w. Tax revenue: 23.7 (2019); 22.2 (2020); 22.6 (2021 Country Report 21/79 1/); 22.9 (2021 projection); 23.6 (2022 projection)
  • Expenditures: 28.9 (2019); 34.4 (2020); 32.6 (2021 Country Report 21/79 1/); 32.2 (2021 projection); 29.7 (2022 projection)
  • Expense: 21.4 (2019); 26.2 (2020); 25.0 (2021 Country Report 21/79 1/); 22.7 (2021 projection)
  • Net acquisition of non-financial assets: 7.6 (2019); 8.1 (2020); 7.4 (2021 Country Report 21/79 1/); 7.2 (2021 projection)
  • Capital spending: 8.0 (2019); 8.6 (2020); 7.9 (2021 Country Report 21/79 1/)
  • Privatization proceeds: -0.4 (2019); -0.5 (2020); -0.8 (2021 Country Report 21/79 1/)
  • Net Lending/Borrowing (GFSM 2001): -1.8 (2019); -9.2 (2020); -7.4 (2021 Country Report 21/79 1/); -6.5 (2021 projection); -3.6 (2022 projection)
  • Budget lending: 0.2 (2019); 0.1 (2020); 0.3 (2021 Country Report 21/79 1/)
  • Augmented Net lending / borrowing (EFF definition)2/: -2.1 (2019); -9.3 (2020); -7.6 (2021 Country Report 21/79 1/); -6.6 (2021 projection); -3.9 (2022 projection)
  • General government debt3/: 40.4 (2019); 60.0 (2020); 60.8 (2021 Country Report 21/79 1/); 54.2 (2021 projection); 53.6 (2022 projection)
  • o.w. Foreign-currency denominated: 32.0 (2019); 47.5 (2020); 49.6 (2021 Country Report 21/79 1/); 43.9 (2021 projection); 42.1 (2022 projection)
• Credit growth
  • Credit to the private sector: 20.7 (2019); 22.4 (2020); 6.4 (2021 Country Report 21/79 1/); 10.5 (2021 projection); 11.8 (2022 projection)
  • In constant exchange rate: 16.1 (2019); 9.0 (2020); 5.5 (2021 Country Report 21/79 1/); 14.0 (2021 projection); 8.5 (2022 projection)
  • Broad money: 17.6 (2019); 24.6 (2020); 16.9 (2021 Country Report 21/79 1/); 14.1 (2021 projection); 19.7 (2022 projection)
• 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 1/); -10.0 (2021 projection)
  • Gross international reserves (billions of US$)4/: 3.9 (2019); 3.6 (2020); 4.0 (2021 Country Report 21/79 1/)
  • In percent of IMF Composite measure (floating): 98.3 (2019); 107.6 (2020); 97.8 (2021 Country Report 21/79 1/); 98.5 (2021 projection)
  • Gross external debt: 106.6 (2019); 129.5 (2020); 133.9 (2021 Country Report 21/79 1/); 116.8 (2021 projection); 111.8 (2022 projection)
• Notes from the table:
  • 1/ Please refer to this link for details https://www.imf.org/en/Publications/CR/Issues/2021/04/16/Georgia-Eighth-Review-Under-the-Extended-Fund-Facility-Arrangement-Press-Release-and-Staff-50358
  • 2/ Augmented Net lending / borrowing (EFF definition) = Net lending / borrowing - Budget lending.
  • 3/ Excludes domestic legacy debt of 1.2 percent of GDP.
  • 4/ Includes IMF SDR allocation of $286 million approved in August 2021.

Source: Press Release No. 21/270, September 21, 2021, IMF Communications Department.

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• სსფ–ს აღმასრულებელ დირექტორთა საბჭოს საქართველოსთან „მეოთხე მუხლის“ კონსულტაციების დასრულება
  • სსფ–ს აღმასრულებელ დირექტორთა საბჭოს საქართველოსთან „მეოთხე მუხლის“ კონსულტაციების დასრულება (Markdown version)
  • სსფ–ს აღმასრულებელ დირექტორთა საბჭოს საქართველოსთან „მეოთხე მუხლის“ კონსულტაციების დასრულება (PDF)

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• IMF COVID-19 Hub
• Policy Tracker
• Financial Assistance
• Questions & Answers
• Georgia and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/Publications/CR/Issues/2021/04/16/Georgia-Eighth-Review-Under-the-Extended-Fund-Facility-Arrangement-Press-Release-and-Staff-50358
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home