Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Georgia
IMF News, April 19, 2006
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- Published: April 19, 2006
Background and recent macroeconomic developments
- Breakup of the Soviet Union caused a steep fall in living standards in Georgia; mid-1990s hyperinflation followed by stabilization efforts and a setback during the Russian crisis.
- Economic growth resumed in 2000; fiscal performance remained poor until recent years, with build-up of domestic arrears.
- Georgia's economy performed well over the last two years (prior to 2006); fiscal turnaround described as impressive.
- Since the change in government in late 2003: renewed commitment to structural reforms, privatization of state-owned enterprises, and legal, fiscal, and financial reforms.
- Prudent macroeconomic policies produced:
- Robust growth rates of about 7 percent on average in 2004-05.
- Average CPI inflation of about 7 percent over the same period.
- Improved fiscal revenues enabled increased spending while maintaining fiscal stability; authorities reformed taxes in 2005, simplified taxes, eliminated nuisance taxes, and lowered most tax rates.
- Tax collections rose from 14.5 percent of GDP in 2003 to an estimated 19.8 percent of GDP in 2005.
- Government eliminated a large part of outstanding domestic arrears and began fiscal decentralization by devolving some responsibilities to local bodies.
- Monetary developments over the past two years included high reserve money growth, remonetization, and more recently a credit boom.
- After late-2004 lax policy, the National Bank of Georgia (NBG) stepped up efforts to contain monetary expansion to meet its inflation target.
- Underexecution of the budget contributed to slowdown of reserve money growth due to higher-than-expected government deposits at the central bank.
- Interest rates on treasury bills decreased since late-2003 turmoil; no treasury bills issued since mid-2005 owing to limited government financing needs.
- Available data indicate the banking system remains strong.
- Exchange rate and external position:
- In 2004 the lari appreciated by 12 percent against the U.S. dollar, improving external debt situation.
- Excluding pipeline-related imports, the current account deficit increased somewhat as a share of GDP over the past two years due to stronger aid inflows and related imports.
- Gross international reserves increased to 2.1 months of nonpipeline imports at end-2005.
- Poverty and PRSP:
- Authorities submitted a Poverty Reduction Strategy Paper (PRSP) progress report in March 2005.
- Data scarce; appears there has been limited progress toward reducing poverty.
Executive Board assessment — key findings
- Directors broadly agreed with staff appraisal and commended authorities for:
- Impressive progress over last two years in maintaining macroeconomic stability, fiscal turnaround, and combating pervasive corruption.
- Continuing structural reforms to improve public sector operations and the business environment and foster private sector development.
- Directors supported the 2006 economic program aiming to:
- Bolster growth and keep inflation at single-digit rates.
- Carry forward structural reform agenda.
- Noted the need for further progress on reducing widespread poverty.
- Fiscal policy and public spending:
- Endorsed plans to increase public spending in priority areas, based on assurances fiscal sustainability will be maintained.
- Welcomed introduction of a medium-term expenditure framework to improve fiscal planning and expenditure control.
- Cautioned decentralization may weaken fiscal transparency; stressed need to monitor Legal Entities of Public Law (LEPLs) transparently and ensure full accountability.
- Encouraged strengthening social safety nets, including introducing the targeted poverty benefit as planned.
- Welcomed gains from 2005 tax reform; encouraged continued strengthening of tax administration.
- Regretted that fewer domestic arrears were cleared than foreseen, but noted commitment to eliminate remaining verified claims by end of 2006.
- Urged government to resist additional spending pressures ahead of local elections in the fall.
- Monetary policy and financial sector:
- Viewed current stance of monetary policy as appropriate; welcomed NBG efforts to contain inflation.
- Observed stronger fiscal position creates new macro policy coordination challenges between fiscal and monetary authorities.
- Noted extremely small treasury bill market complicates liquidity management.
- Welcomed memorandum of understanding between NBG and ministry of finance on securitizing some outstanding nontradable debt held by NBG to provide monetary policy instruments.
- Encouraged strengthening autonomy of the central bank.
- Noted improved outlook and capital inflows could cause appreciation pressures; endorsed authorities' commitment to a floating regime with FX interventions limited to smoothing temporary and extreme fluctuations.
- Commended efforts to strengthen financial system; cautioned strong credit growth requires robust banking supervision to avoid credit boom pitfalls.
- Looked forward to discussing ongoing Financial Sector Assessment Program (FSAP) update at next review.
- Welcomed NBG strategy to attract international interest, consolidate banking sector, and foster competition.
- Structural reforms, governance, and trade:
- Welcomed progress fighting corruption, improving governance and transparency, and enhancing business climate.
- Endorsed structural reform agenda to remove infrastructure and energy bottlenecks; recommended strengthening legal institutions to entrench good governance and enforce creditor and property rights.
- Stressed importance of advancing privatization agenda.
- Welcomed planned liberalization of trade regime as a step to strengthen competitiveness.
- Debt and data:
- Broad agreement with recent debt sustainability analysis: 2004 currency appreciation and government repayment efforts eased debt burden considerably.
- Welcomed bilateral agreements following July 2004 Paris Club debt rescheduling; urged finalization of outstanding agreements with Paris Club and other bilateral creditors on comparable terms.
- Noted data provision is adequate for surveillance and program monitoring, but encouraged further strengthening of statistical database (national accounts, balance of payments, fiscal statistics) with IMF technical assistance.
Selected economic and financial indicators, 2002–05 (as presented)
- National income and prices (Percentage change relative to previous year, unless otherwise indicated)
- GDP at constant prices: 2002: 5.5; 2003: 11.1; 2004: 5.9; 2005: 9.3
- Consumer price index, end-of-period: 2002: 5.4; 2003: 7.0; 2004: 7.5; 2005: 6.2
- Money and credit (end-of-period)
- Reserve money: 2002: 18.4; 2003: 13.9; 2004: 44.3; 2005: 19.7
- Broad money (including foreign exch. deposits): 2002: 17.9; 2003: 22.8; 2004: 42.6; 2005: 26.4
- Public Finance (In percent of GDP, unless otherwise indicated)
- Total revenue and grants: 2002: 15.8; 2003: 16.2; 2004: 21.7; 2005: 23.4
- Tax revenue: 2002: 14.4; 2003: 14.5; 2004: 18.2; 2005: 19.8
- Total expenditure and net lending: 2002: 17.8; 2003: 18.7; 2004: 18.6; 2005: 24.9
- Fiscal balance, commitment basis: 2002: -2.0; 2003: -2.5; 2004: 3.1; 2005: -1.5
- Fiscal balance, cash basis: 2002: -1.9; 2003: -1.3; 2004: -0.2; 2005: -2.4
- External sector (In percent of GDP, unless otherwise indicated)
- Trade balance: 2002: -12.9; 2003: -15.0; 2004: -13.8; 2005: -14.1
- Current account balance (excl. pipeline imports): 2002: -5.5; 2003: -2.8; 2004: -3.5; 2005: -4.1
- External debt: 2002: 51.7; 2003: 46.3; 2004: 35.8; 2005: 27.1
- Gross international reserves in months of imports 2/: 2002: 1.1; 2003: 1.5; 2004: 2.0; 2005: 2.1
- Exchange rate
- Exchange rate, lari/U.S. dollar, period average: 2002: 2.20; 2003: 2.15; 2004: 1.92; 2005: 1.81
Public Information Notice (PIN) No. 06/42, April 19, 2006, IMF.