Press Release No. 24/181

IMF Executive Board Concludes 2024 Article IV Consultation with Georgia

May 24, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Georgia.[1]

Financial inflows triggered by Russia’s war in Ukraine continue to moderate but remain above pre-war levels, supporting a positive macroeconomic outlook. In 2024, growth is expected to ease but remain above trend, inflation is expected to pick-up as monetary policy continues to normalize, and the current account deficit is expected to widen from historic lows. Over the medium term, growth would converge to its potential rate of 5 percent, inflation to the National Bank of Georgia’s (NBG) 3 percent target, and the current account deficit to 5.5 percent of GDP, supported by continued improvements in services exports.

Risks to the outlook are tilted to the downside. A reversal of war-related migrant and financial inflows and intensification of sanctions that affect Georgia and geo-economic fragmentation remain key downside risks. Replenished fiscal and reserve buffers, as well as abundant bank capital and FX liquidity would mitigate such risks. A loss of reform momentum before the October Parliamentary elections and growing concerns about governance also pose downside risks. On the upside, EU candidate status could send a positive signal, including for investments, if reforms gain impetus to move the accession process forward.

The authorities have pursued prudent policies to secure macroeconomic and financial stability. The NBG has maintained a tight monetary policy stance, normalizing the policy rate gradually, while using macroprudential measures to address systemic risks. Despite significant foreign exchange purchases, reserves fell below the IMF’s adequacy metric. There remain gaps in the NBG Law regarding NBG governance and independence. Adequate buffers have been maintained under the fiscal rules and good progress has been achieved in evaluating tax expenditures and strengthening public investment management. Progress has been slow on developing a Medium-Term Revenue Strategy to build space for spending priorities and reforming the SOEs to limit their fiscal risks.

The authorities have taken significant steps to address entrenched high unemployment and diversify the economy, including by pursuing trade agreements and infrastructure investments. Challenges remain in improving the quality of education and productivity, particularly in the agricultural sector, as well as in bolstering the judicial system and the anti-corruption authority to strengthen governance.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed Georgia’s resilience in the face of multiple shocks.  While noting the continued strong macroeconomic performance, Directors highlighted that the global environment is highly uncertain and that the outlook is subject to significant downside risks. They called for continued prudent policies to strengthen resilience and structural reforms to boost potential growth, support more inclusive, job rich growth, and ensure progress toward EU accession. Directors underscored the importance of continued Fund engagement to support these goals.

Directors supported the authorities’ plans for continued modest medium term fiscal adjustment to ensure sufficient buffers under the fiscal rule, while creating room for social and infrastructure spending. They agreed that the adjustment should be underpinned by a medium-term revenue strategy focused on streamlined tax expenditures and improved revenue administration, along with enhanced spending prioritization and efficiency. Noting the importance of limiting fiscal risks, Directors urged the authorities to prioritize state owned enterprise reform, particularly to strengthen oversight and governance. They also encouraged steadfast implementation of renewable energy development strategies.

Directors commended the National Bank of Georgia’s (NBG’s) prudent approach to monetary policy, which has helped to maintain low and stable inflation. They recommended a gradual and cautious, data driven approach to further policy rate cuts and clear communication to anchor inflation expectations. Directors emphasized that strengthening the NBG’s governance framework and independence is essential to safeguard monetary policy credibility. Noting the high exposure to external shocks, Directors called for continued exchange rate flexibility and reserve accumulation.

Directors welcomed the continued resilience of the banking system and commended the proactive use of macroprudential and prudential measures to manage financial sector risks.  They highlight, however, that the banking system remains highly concentrated and dollarized and agreed that these risks can only be sustainably addressed by improving competition in the banking system and strengthening macroeconomic policy frameworks. Noting the high uncertainty around global financial conditions, Directors recommended maintaining adequate capital and liquidity buffers. Directors urged continued vigilance against risks from capital inflows, virtual assets, and sanctions, and underscored the importance of strong AML/CFT controls.

Directors recognized the progress on tackling high unemployment and diversifying the economy. They nonetheless underscored the need for continued efforts to enhance infrastructure investments to foster regional connectivity and further diversify the economy. Enhancing the quality of education and improving agricultural productivity would help to address low rural labor force participation. Directors stressed the need to improve governance and anti-corruption frameworks and highlighted that reform of the judicial system and the anti-corruption authority is important to improve the business environment.

It is expected that the next Article IV consultation with Georgia will be held on the standard 12-month cycle.

[1] Under 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.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.