Press Release No. 01/4

The Executive Board of the International Monetary Fund (IMF) today approved a three-year loan under the Poverty Reduction and Growth Facility (PRGF)¹ in an amount equivalent to SDR 108 million (about US$141 million) to support the government's economic program. The first disbursement of SDR 9.0 million (about US$12 million) under the new program will become available immediately.

Following the IMF Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director said:

"Georgia's economic program for the next three years aims to lay the foundation for faster growth and poverty reduction, while addressing the problem of the country's large external debts. To achieve these objectives, the program focuses on the maintenance of macroeconomic stability, through continued prudent monetary policy and a sustained fiscal consolidation, together with structural and institutional reforms to strengthen governance and tackle corruption. Improvements in tax and customs administration and expenditure control are crucial, as governance problems in these areas in the past have undermined investment, economic growth, and fiscal policy. The budget for 2001, recently approved by parliament, provides a sound basis for the necessary fiscal adjustment, with a projected increase in revenues, a reduction in the fiscal deficit, and a repayment of budgetary arrears, particularly wage and pension arrears.

"Given Georgia's large external debts and debt service payments, Directors noted the authorities' efforts, in conjunction with their macroeconomic policies, to reach agreements on debt rescheduling with bilateral creditors, which the authorities are pursuing at the Paris Club. They urged Georgia and its bilateral creditors to pursue discussions in a cooperative spirit. Success in reducing the large debts of the energy sector would have a strong beneficial effect on the fiscal and external financing positions as well as on the stability of energy supplies.

"The authorities have outlined their strategies for reducing poverty and fighting corruption in an interim Poverty Reduction Strategy Paper (PRSP) and an anti-corruption strategy paper. The former provides a sound basis for the development of a full PRSP and the further specification of policies, and for concessional support from the Fund under the Poverty Reduction and Growth Facility. The publication of these papers is an important step toward an open and inclusive process of developing and implementing structural and institutional reforms. The sustainability of macroeconomic stability and growth will depend largely on the success of these reforms," Mr. Sugisaki said.

ANNEX

Program Summary

Georgia's fiscal performance began deteriorating in mid-1999, however this was halted in mid-2000 as the newly appointed government revised the budget, incorporating a strong fiscal adjustment. Since then, tax revenue collections have increased and the balance of payments position has strengthened, despite a recent drought affecting the agriculture sector which accounts for about a quarter of GDP.

Georgia's new economic program for 2001-2003 focuses on policies that would help the country achieve sustainable economic growth and reduce poverty. The centerpiece of the authorities' program is fiscal consolidation, to put the economy on a path to fiscal sustainability, establish the ability of the government to meet its commitments, and underpin efforts to resolve the large external debt burden. Under the program, real GDP growth is projected to reach 3 ¾ percent in 2001, compared to 1 ¼ percent in 2000; end-year inflation is expected to be 6 percent in 2001 and international reserves are programmed to reach the equivalent of 1 ½ months of imports of goods and services by the end of the year.

The fiscal program for 2001 will target a reduction in the commitments deficit to 2 percent of GDP, from 4 ½ percent in 2000. The primary deficit will be effectively reduced to zero, compared with 1 ¾ percent of GDP in 2000. Fiscal performance is expected to improve in 2001 with a containment of expenditure commitments, in line with the revised budget of 2000, toward more realistic levels that should arrest the accumulation of budgetary arrears. On the revenue side, plans are to increase tax collections by accelerating reforms in tax and customs administration.

The National Bank of Georgia has committed itself to maintaining a prudent monetary policy in order to support price stability under a floating exchange rate regime. The economic program is designed to continue the low inflation and stable exchange rate achieved in 2000.

At the heart of Georgia's medium-term policy agenda are plans for a comprehensive set of structural reforms, in particular institutional reforms to strengthen governance and combat corruption, which has undermined both fiscal policy and economic growth. To this end, the economic program includes measures to promote the effectiveness and transparency of fiscal and financial institutions, particularly in the tax collecting agencies. Another priority is to address the problem of energy sector debts.

The government's interim Poverty Reduction Strategy Paper has laid out structural reforms in five main areas to reduce poverty and stimulate economic growth: (i) social sector reforms to improve allocation of benefits to better target the poor; (ii) supportive macroeconomic policies, such as tax and customs administration, to raise fiscal revenues while reducing the budget deficit; (iii) public administration reform based on recommendations of the anti-corruption commission; (iv) private sector development to foster investment in infrastructure as well as other areas; and, (v) agricultural reform.

Georgia became a member of the IMF on May 5, 1992; its quota² is SDR 150.3 million (about US$197 million), and its outstanding use of IMF credit currently totals SDR 211 million (about US$276 million).

Table 1. Georgia: Selected Economic and Financial Indicators, 1996-2001   1996 1997 1998 1999 2000   2001           Projection 1/   Program 2/   (Percentage change relative to previous year; unless otherwise indicated)                 National income and prices               Nominal GDP 55.0 19.1 7.8 13.4 9.5   11.8 GDP at constant prices 10.5 10.7 2.9 2.9 1.2   3.8 Nominal GDP (in millions of lari) 3,786 4,511 4,863 5,513 6,035   6,748 Consumer price index, period average 39.3 7.0 3.6 19.1 4.3   7.6 Consumer price index, end-of-period 13.7 7.2 10.7 10.9 6.8   5.9                 General government               Total revenue (excl. grants) 145 42 13 11 7   20 Total expenditure and net lending 78 21 12 14 -6   8                 External sector 3/               Exports 15 18 -3 0 9   9 Imports 10 37 11 -13 9   6                 Money and credit (end-of-period)               Reserve money 36 33 -6 19 13   12 Credit to enterprises and households (banking system) -15 38 38 33 17   11 Broad money (including forex deposits) 42 46 -1 21 23   18 Velocity, level 4/ 14.8 12.1 13.2 12.4 11.0   10.5 Money multiplier, level 1.23 1.35 1.42 1.44 1.57   1.64                 Gross international reserves               In months of imports of goods and services 2.2 1.5 1.0 1.3 1.2   1.6 In millions of U.S. dollars 158 173 118 132 136   199                 Exchange rate, lari/U.S. dollar               Period average 1.26 1.30 1.39 2.02 1.97   ... End-of-period 1.27 1.30 1.79 1.96 ...   ...                   (In percent of GDP; unless otherwise indicated)                 General government               Total revenue and grants 14.0 14.8 16.2 15.8 15.0   16.8 Tax revenue 5/ 10.8 13.0 13.2 14.2 14.1   14.9 Tax revenue (in percent of current expenditure) 55.6 65.9 64.5 69.1 79.0   87.3 Total expenditure and net lending 6/ 21.4 21.8 22.5 22.7 19.5   18.8 Current expenditure 19.5 19.7 20.5 20.5 17.9   17.1 Fiscal balance, commitment basis -7.4 -7.0 -6.4 -6.9 -4.6   -2.0 Fiscal balance, cash basis -7.2 -6.3 -5.1 -5.1 -3.2   -3.2                 External sector               Trade balance -11.7 -16.1 -19.6 -19.8 -19.0   -17.8 Current account balance               Excluding transfers -13.9 -16.5 -17.2 -14.9 -13.7   -12.4 Including transfers -9.2 -10.8 -11.1 -8.0 -8.1   -7.1 Sources: Georgian authorities; and Fund staff estimates.                 1/ Projection as of December 2000. Reflecting output losses due to the drought, and assuming disbursements by the IMF and the World Bank in the fourth quarter of 2000. 2/ Scenario based on an economic program that could be supported under the IMF's PRGF facility.       3/ Goods only; in US$ terms.               4/ Annual GDP divided by end-period M3.               5/ Includes general government tax revenue and special state funds. The latter include the Pension, Employment, and Road Funds. Privatization revenue is excluded. 6/ On a commitment basis. Cash expenditures differ by the change in expenditure arrears.         1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for Georgia, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is under way. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an annual interest rate of 0.5%, and are repayable over 10 years with a 5½-year grace period in principal payments. 2 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.