## Georgia: Concluding Statement of an IMF Staff Visit

_IMF News, March 4, 2015_

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## Bibliographic details
- Published: March 4, 2015

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### Major findings: external shocks and economic impact
- Georgia’s economy has been hit by a combination of severe external shocks: the Russia-Ukraine crisis, the deepening recession in Russia, and currency devaluations in trading partner countries.
- Exports are 30 percent lower than one year ago.
- Remittances from Georgian workers abroad are down 25 percent.
- Output growth: in January, output grew by only 0.5 percent compared to one year ago.
- Growth projection: while growth this year could reach 2 percent, this projection is subject to risks from slower trading-partner economies and their exchange rate depreciation.

### External sector, exchange rate, and vulnerabilities
- The current account deficit in 2014 increased to around 9.5 percent of GDP.
- The Lari has depreciated by more than 20 percent against the US dollar since January 2014.
- Most regional currencies have depreciated by even more; the Lari depreciation will increase costs for borrowers with foreign-currency debt and will slow economic growth.
- Lower oil and import prices should contain inflationary pressures despite depreciation.

### Inflation outlook
- National Bank of Georgia (NBG) inflation target: 5 percent.
- Inflation in February was 1.3 percent.
- Because of the depreciation, inflation will likely pick up somewhat in coming months towards the 5 percent target, but from a low starting point partly due to lower oil prices.

### Fiscal position and recommendations
- The government kept the budget deficit to 3 percent of GDP in 2014, well below the program target.
- For 2015, lower growth implies tax revenues will be less than projected in the budget.
- The government has limited employee bonuses and taken efforts to contain administrative spending.
- Policy recommendations:
  - Build on existing decisions and pass amendments to the budget that include specific tax increases and spending cuts to limit the increase in the budget deficit.
  - Maintain spending on the social safety net and improve targeting to protect the vulnerable and the poor.

### Monetary policy stance and central bank independence
- The mission fully supports the NBG’s policy to refrain from intervening in the foreign exchange market and to allow the Lari to float.
- Rationale:
  - The NBG’s main objective is price stability; achieving this goal depends on having a floating exchange rate.
  - A floating rate allows the exchange rate to absorb external shocks.
  - Intervening to resist likely long-lasting shocks would waste foreign currency reserves and slow the reduction of Georgia’s trade deficit.
- Independence of the NBG should be preserved and respected so it can pursue price stability and ensure a healthy financial sector.

### Structural reforms and medium-term priorities
- Georgia’s solid fundamentals, reform-minded authorities, and the Association Agreement with the EU position the country to overcome current challenges.
- Recommended reforms to accelerate growth and attract investment:
  - Ease recent restrictions on foreign businesses.
  - Seek out new private investment.
  - Boost saving through pension and capital market reforms.
  - Raise educational standards.

### Next steps and mission conclusion
- The mission looks forward to the government preparing specific amendments to the budget that will limit the budget deficit.
- The mission expects the authorities to continue adhering to their floating exchange rate policy.
- The mission hopes these steps will be taken quickly so that the IMF mission can return soon to Georgia for the Second Review.

*Mission Concluding Statement — March 4, 2015*

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## References

- [Georgia and the IMF](http://www.imf.org/external/country/GEO/index.htm)
- [Russian Federation and the IMF](http://www.imf.org/external/country/RUS/index.htm)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2015/09/28/04/52/mcs030415_