## Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Georgia _IMF News, March 27, 2009_ ## Source details **Canonical URL:** [Public Information Notice: IMF Executive Board Concludes 2009 Article IV Consultation with Georgia](https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0937) ## Other formats - [Markdown version](/en/news/articles/2015/09/28/04/53/pn0937/index.md) - [Structured JSON version](/en/news/articles/2015/09/28/04/53/pn0937/index.json) - [Bundle manifest](/en/news/articles/2015/09/28/04/53/pn0937/bundle-manifest.json) ## Bibliographic details - Published: March 27, 2009 --- ### Background - Executive Board concluded the Article IV consultation with Georgia on March 23, 2009.1 - Combined shocks: August 2008 armed conflict and the global crisis led to: - Real GDP growth decline from 12½ percent in 2007 to an estimated 2 percent in 2008, after a sharp contraction in the second half of the year. - Inflation slowed to 5½ percent at end-2008 as global food and energy prices receded and demand weakened. - External current account deficit estimated at 22½ percent of GDP in 2008 but narrowed substantially in the second half of the year. - Private capital inflows dropped from $1.7 billion during the first half of the year to an estimated $450 million during the second half. - Gross official reserves fell immediately after the conflict but recovered later, aided by: - donor support, - borrowing from the Fund under the Stand-By Arrangement approved last September, - transfers from the sovereign wealth funds to government accounts in the central bank. - Fiscal and monetary developments: - Fiscal deficit widened markedly in 2008; composition of spending shifted from high defense and election outlays in the first half to infrastructure and social spending in the second half. - Monetary policy had focused on resisting inflationary pressures until the conflict, then faced declining demand for local currency and bank liquidity issues. - Central bank intervened heavily in the foreign exchange market to support the lari. - Banks stopped new lending despite central bank liquidity injections, reduced reserve requirements and policy rate cuts. - Banking sector vulnerabilities: - Tightening of credit conditions and economic weakening exposed liquidity and solvency deterioration. - Nonperforming loans increased sharply; need for loan-loss provisioning, higher funding costs and lost interest income affected profitability. - Structural reforms in early 2008: - Gradual reduction of income and dividend taxes. - Introduction of rules to guide fiscal and monetary policies in the medium term while ensuring public sector discipline and price stability. ### Executive Board Assessment — Findings and Risks - Directors observed that the Georgian economy was seriously affected by the August 2008 armed conflict and the global downturn. - Directors judged combined shocks to the current and capital accounts likely to be larger and more prolonged than originally expected, increasing external adjustment challenges and diminishing near-term growth prospects. - Directors endorsed the authorities’ economic strategy: - Fiscal policy to support domestic demand. - Exchange rate flexibility to achieve external stability. - Structural reforms to secure sustained economic growth over the medium term. - Directors saw considerable downside risks to the economic outlook and recommended readiness to adapt policies as warranted. - Support for authorities’ plans: - Contain slowdown through a donor-financed fiscal stimulus and reorientation of expenditures. - Authorities reduced targeted 2009 fiscal deficit in line with a downward revision in expected official external financing. - Expenditure switched from imported defense goods toward essential productivity-enhancing infrastructure investment and better targeted social spending. - Directors welcomed planned expenditure management reforms. - Exchange rate and reserves: - Move to foreign exchange auctions welcomed as important for greater exchange rate flexibility and protecting international reserves, which are relatively low. - Agreed exchange rate flexibility needed to be managed to preserve confidence in the financial sector. - Directors took note of the staff assessment that the real effective exchange rate is overvalued. - Over the medium term, commitment to exchange rate flexibility and structural reforms should help correct the overvaluation and reduce vulnerabilities from the large underlying current account deficit. - Monetary policy and liquidity management: - Recommended all instruments of monetary policy, including the interest rate and reserve requirements, be employed to support more cautious liquidity management and ease pressures on the foreign exchange market. - Welcomed planned improvement of the central bank’s liquidity framework to strengthen effectiveness of interest rate policy. - Stressed importance of closely coordinating fiscal and monetary policies to contain pressures in the foreign exchange market. - Financial sector stability: - Close supervision emphasized given deterioration in banks’ loan portfolios and profitability. - Welcomed Financial Supervisory Agency’s actions to increase provisioning based on bank-by-bank assessments. - Noted upcoming technical assistance from the Fund to strengthen stress-testing capability. - Endorsed authorities’ measures to bolster depositor confidence through increased transparency and adequate safety nets. - Welcomed authorities’ commitment to developing a financial stability plan to respond to potential situations of stress. ### Key Statistics — Georgia: Selected Economic Indicators, 2004–2008 - Real Sector - Real GDP growth (percentage change): 2004: 5.9; 2005: 9.6; 2006: 9.4; 2007: 12.4; 2008: 2.0 - GDP (in millions of U.S. dollars): 2004: 5,126; 2005: 6,411; 2006: 7,768; 2007: 10,227; 2008: 12,870 - GDP per capita (in U.S. dollars): 2004: 1,188; 2005: 1,486; 2006: 1,800; 2007: 2,324; 2008: 2,925 - Inflation (in percent) — Period average: 2004: 5.7; 2005: 8.3; 2006: 9.2; 2007: 10.0; 2008: (no period-average value listed) - Inflation (in percent) — End-of-period: 2004: 7.5; 2005: 6.2; 2006: 8.8; 2007: 11.0; 2008: 5.5 - Central government operations (in percent of GDP) - Revenue and grants: 2004: 23.1; 2005: 24.4; 2006: 26.7; 2007: 29.3; 2008: 30.7 - Expenditure and net lending: 2004: 20.7; 2005: 26.0; 2006: 29.7; 2007: 34.0; 2008: 37.1 - Overall balance (cash basis): 2004: 2.4; 2005: -1.6; 2006: -3.0; 2007: -4.7; 2008: -6.4 - Monetary indicators - Reserve money (end-of-period growth rate, in percent): 2004: 44.3; 2005: 19.7; 2006: 19.2; 2007: 25.6; 2008: -4.5 - Broad money (end-of-period growth rate, in percent): 2004: 42.6; 2005: 26.4; 2006: 39.3; 2007: 49.6; 2008: 7.0 - Broad money velocity: 2004: 7.64; 2005: 6.79; 2006: 5.18; 2007: 4.27; 2008: 4.48 - External Sector - Current account balance (including transfers) — In millions of U.S. dollars: 2004: -344; 2005: -701; 2006: -1,174; 2007: -2,006; 2008: -2,911 - Current account balance (including transfers) — In percent of GDP: 2004: -6.7; 2005: -10.9; 2006: -15.1; 2007: -19.6; 2008: -22.6 - External debt (in millions of U.S. dollars): 2004: 2,138; 2005: 2,095; 2006: 2,328; 2007: 3,136; 2008: 4,581 - External debt (in percent of exports of goods and services): 2004: 41.7; 2005: 32.7; 2006: 30.0; 2007: 35.6; 2008: (no value listed) - Gross official international reserves (in millions of U.S. dollars): 2004: 352; 2005: 474; 2006: 881; 2007: 1,361; 2008: 1,480 - Gross official international reserves (in months of imports of goods and services): 2004: 1.3; 2005: 1.8; 2006: 2.2; 2007: 3.0; 2008: (no value listed) - Exchange rate, lari/dollar, period average: 2004: 1.92; 2005: 1.81; 2006: 1.78; 2007: 1.66; 2008: 1.48 *Source: Public Information Notice (PIN) No. 09/37, March 27, 2009.* --- ## References - [Georgia and the IMF](http://www.imf.org/external/country/GEO/index.htm) - [Public Information Notices](https://www.imf.org/en/news/searchnews) - [https://www.imf.org/en/home](https://www.imf.org/en/home) _Source: https://www.imf.org/en/news/articles/2015/09/28/04/53/pn0937_