Press Release No. 98/33

The International Monetary Fund (IMF) has approved the third annual loan under the Enhanced Structural Adjustment Facility (ESAF),¹ in an amount equivalent to SDR 55.5 million (about US$74 million), to support Georgia’s economic program in 1998. The loan is available in two equal installments, the first of which is available immediately.

Background

During the last three years, Georgia has made major efforts to stabilize its economy and implement structural reform. The payoff from these efforts has been significant, with the economy growing at annual rates of more than 10 percent for two consecutive years and real wages starting to recover. Inflation has been brought down to single-digit levels from hyperinflation in 1993/94, and the international reserve position has improved significantly. Key ingredients in this success have been an increase in tax collection and a reduction in the overall fiscal deficit, complemented by prudent monetary and credit policies, which have contributed to lower inflationary expectations.

Medium-Term Strategy and the 1998 Program

The government’s medium-term strategy aims at consolidating macroeconomic stabilization gains, achieving greater external viability, accelerating structural reforms, and keeping the economy on a sustainable growth path while strengthening the social safety net. The main macroeconomic objectives for 1998-2000 are an annual growth rate of 8-10 percent, an inflation rate of 4 percent by 2000, and an increase in central bank gross reserves to the equivalent of 2.8 months of imports by 2000.

The 1998 program targets GDP growth of 10 percent, a fall in the inflation rate to 6 percent, and an increase in gross official reserves equivalent to about 2.3 months of imports. To these ends, the overall fiscal deficit will narrow to 2.5 percent of GDP in 1998 from about 3.8 percent of GDP in 1997 as a result of increasing revenue, while allowing expenditure to continue to rise moderately. Expenditure arrears are targeted to be eliminated by the end of December 1998. These efforts will be supported by prudent monetary and credit policies.

Structural Reforms

Structural policies aim at fostering private sector development and sustaining economic growth, in particular through urban and industrial land privatization; faster privatization ofmedium and large-scale enterprises; removing trade restrictions; restructuring the electricity sector; and strengthening of banks’ prudential regulations. The program also envisages judicial reform to ensure effective implementation of the many laws that the Georgian parliament enacted during the last two years.

Addressing Social Needs

Poverty alleviation will continue to be a key consideration in the reform program. The authorities intend to protect the poor and improve the targeting of benefits. They have given priority to eliminating arrears on wages, pensions, and social transfers. In addition, government spending on health and education is targeted to rise to 21 percent of total budgetary appropriations in 1998.

The Challenge Ahead

The authorities have had a positive record of achievement under the first and second annual ESAF programs. They have formulated a strong program for 1998 that will keep Georgia on a path of sustained economic growth and low inflation. The program deserves international support.

Georgia joined the IMF on May 5, 1992; its quota² is SDR 111.0 million (about US$148 million); its outstanding use of IMF credit currently totals SDR 189 million (about US$252 million).

Georgia: Selected Economic and Financial Indicators, 1994-98 1994 1995 1996 1997 1998 Actual Actual Actual Prel. Program Act. Proj. (Percentage change, unless otherwise indicated) National income and prices Nominal GDP 8,273 169 55 19 17 GDP at constant prices -11 2 11 11 10 Consumer price index, period average 15,607 162.7 39.4 7.1 6.5 Consumer price index, end-period 6,474 57.4 13.7 7.3 6.0 General government Total revenue 15,022 227 145 46 42 Total expenditure (excluding net lending) 5,376 33 88 21 13 1/ External sector 2/ Exports ... -5 15 11 21 Imports ... -6 10 23 15 Money, credit, and interest rates (end-period) Reserve money 2,480 275 36 33 12 Credit to enterprises and households (banking system) 3/ 3,663 39 -15 38 41 Broad money (including forex deposits) 2,342 135 42 46 26 Velocity, level 17.9 20.5 22.3 18.2 16.9 Money multiplier 1.87 1.17 1.23 1.35 1.52 Deposit interest rate (in percent; 3 month maturity) 49 15 14 11 ... Lending interest rate (in percent; 3 month maturity) 115 66 51 49 ... Gross international reserves In months of imports of goods 0.7 2.7 2.5 2.2 2.3 In millions of US$ 41 157 158 173 210 Exchange rate, lari per US$ (end-period) 4/ 1.28 1.23 1.27 1.30 ... (In percent of GDP, unless otherwise indicated) General government Revenue (excluding grants) 4.2 5.1 8.1 10.0 12.1 Tax revenue 5/ 3.7 4.6 6.9 8.8 10.3 Tax revenue (in percent of current expenditure) 17.0 53.3 53.8 66.0 81.6 Expenditure 23.5 11.6 14.1 14.4 13.9 6/ Net lending 0.7 0.7 -0.2 0.1 0.5 Fiscal balance, cash basis -7.4 -4.5 -4.4 -3.8 -2.5 Fiscal balance, commitment basis -16.5 -5.3 -4.5 -4.1 -1.5 External sector Trade balance -29 -12 -8 -9 -9 Current account balance Excluding official transfers -36 -14 -9 -10 -10 Including official transfers -22 -8 -6 -7 -7 Sources: Georgian authorities; and IMF staff estimates. 1/ For 1998, excludes the programmed reduction of lari 70 million in expenditure arrears. Inclusive of this reduction in expenditure arrears, the nominal increase in expenditures during 1998 relative to the 1997 level would be 20 percent. 2/ Goods only; in US$ terms. 3/ The sharp fall in 1996, reflects the provision made for non-performing loans from commercial banks portfolio in the context of the bank restructuring program. Inclusive of this adjustment, credit to enterprises and households would have grown by about 30 percent in nominal terms during 1996. 4/ Lari replaced the Georgian coupon in September/October 1995 at a conversion rate of 1 lari/1million coupon. This rate is used to convert coupons to lari for the period prior to September 1995. 5/ Includes general government tax revenue and special state funds. The latter include the Pension, Employment, and Road Funds. Privatization revenue is excluded. 6/ For 1998, excludes the programmed reduction of lari 70 million in expenditure arrears. Inclusive of this reduction in expenditure arrears, total expenditure arrears, total expenditure in 1998 (excluding net lending) would amount to 14.7 percent og GDP. 1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5½-year grace period. 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 share in the allocation of SDRs.