## Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Georgia

_IMF News, April 19, 2006_

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## Bibliographic details
- Published: April 19, 2006

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### 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.*

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## References

- [Georgia and the IMF](http://www.imf.org/external/country/GEO/index.htm)
- [Public Information Notices](https://www.imf.org/en/news/searchnews)
- [Article IV](https://www.imf.org/external/pubs/ft/aa/aa04.htm)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

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