For more information, see Georgia and the IMF

The following item is a Letter of Intent of the government of Georgia, which describes the policies that Georgia intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Georgia, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

July 9, 1998

Dear Mr. Camdessus:

1. During 1997, Georgia continued to make significant progress under the economic reform program launched in 1994. Economic recovery continued at a brisk pace, the annual inflation rate reached single digit levels of about 7 percent, and the exchange rate remained stable against the U.S. dollar, while the National Bank of Georgia was able to increase its gross international reserves considerably. Substantial progress was also made in systemic reform, particularly in agricultural land and enterprise privatization. On the external front, the reform program has made important steps toward restoring external viability and it is the government's intention to normalize relations with all of Georgia's external creditors. Foreign direct investment has continued to increase signaling the credibility of our reform efforts in the eyes of the international community.

2. We have outlined our updated medium-term reform program in a Policy Framework Paper which we have forwarded to you under a separate cover. The attached Statement of Economic and Financial Policies explains our macroeconomic objectives for 1998 and the policies we intend to implement to achieve them. As in previous years, the key challenge for 1998 will be to mobilize government revenue and work toward the establishment of a more fair tax system. To that effect we have recently introduced a number of new taxes and intend to adopt further measures to advance the reform in the tax system and improve tax and customs administration. While some sectors of the economy continue to benefit from lower taxation than others, these exemptions are only temporary and will be phased out over the next two years. In addition, we will continue with the implementation of structural reforms, paying special attention to privatization of large-scale public enterprises, banking system reform, and the opening of the economy. On the latter, we have recently lifted the export ban on scrap metal and removed export restrictions on wood.

3. In support of our reform program, Georgia requests a third annual arrangement under the Enhanced Structural Adjustment Facility (ESAF) in an amount equivalent to SDR 55.5 million (50 percent of quota). Georgia will provide any information the Fund may request regarding the progress achieved in the implementation of its economic and financial policies and in the attainment of the objectives of the program.

4. I am confident that the policies and measures described in the attached statement are adequate to achieve the objectives of the program. The government and the National Bank of Georgia will regularly consult with the Fund and take any additional policy measures that may become appropriate throughout the program period. During the period of the third annual ESAF arrangement and while Georgia has outstanding financial obligations to the Fund arising from loans and purchases under earlier arrangements, the government will consult with the Fund from time to time at the initiative of the Government or at the request of the Managing Director. Georgia will conduct with the Fund a mid-term review of its third annual program no later than December 1998, as described in paragraph 39 of the attached Statement of Economic and Financial Policies. It is our understanding that the mid-term review will address issues related to overall program implementation, tax policy, the draft 1999 budget, and trade liberalization. Following the expiration of the current ESAF arrangement, we would like to seek continued Fund support of our ongoing economic reform program.

Sincerely yours,

/s/

Eduard Shevardnadze
President of Georgia





Attachment: Statement of Economic and Financial Policies

Mr. Michel Camdessus
The Managing Director
International Monetary Fund
Washington, D.C. 20431




Georgia

Statement of Economic and Financial Policies

I. Introduction

1. Georgia has continued to make significant progress under the economic reform program launched in 1994. Following four years of output collapse, economic growth resumed in 1995 and continued at a fast pace in 1996 and 1997. Inflation has come down from hyperinflation levels at the beginning of the program to single-digit levels in 1997 and Georgia currently enjoys one of the lowest inflation rates among CIS countries. The exchange rate has remained broadly stable against the U.S. dollar since the introduction of the lari in October 1995 and the NBG's reserves position has increased significantly compared to 1994 levels. Georgia has also made progress in the implementation of structural reforms, particularly in agricultural land and enterprise privatization, banking sector restructuring, the social safety net, and the development of an appropriate legal framework for a market-based economy. Moreover, significant gains have been achieved in normalizing Georgia's relations with external creditors and making progress toward external viability.

2. While progress with stabilization and structural reform has been significant, the task of reducing the economy's domestic and external imbalances is far from complete. In particular, despite recent improvements, the public finances have remained weak as manifested by a low tax/GDP ratio, the government's inability to cover its current expenditures with tax revenue, and the undersupply of basic goods in the social sphere (health and education) and vital infrastructure. Against this background, the economic reform program for the near- and long-term will focus primarily in mobilizing revenue, while at the same time accelerating structural reform to foster private investment and saving, and to reduce poverty. Moreover, economic reform will aim at making progress in fighting corruption, increasing accountability of executive public bodies, and boosting good governance.

3. Georgia's updated medium-term program for 1998-2000 is outlined in the Policy Framework Paper (PFP), which has been prepared in close collaboration with the staffs of the International Monetary Fund (IMF) and the World Bank. For 1998, the Georgian government is seeking continued Fund support for its program through a third annual arrangement under the Enhanced Structural Adjustment Facility (ESAF). It also expects financing from the World Bank under the Second Structural Adjustment Credit (SAC II) and related technical assistance credits. Discussions on a Third Structural Adjustment Credit (SAC III) are likely to start in the second half of 1998. Assistance from other multilateral institutions and bilateral donors and creditors is also expected in 1998.

II. Recent Economic Developments and Performance under the Program

4. Economic developments during 1997 and the first four months of 1998 were in line with the government's strategy to reduce inflation, foster economic growth, and develop a market economy. Annual consumer inflation fell to 7.3 percent in 1997 and this downward trend of inflation has continued into 1998 on account of prudent financial policies. Real GDP increased by about 11 percent in 1997, sustained by a rapid increase in the services sector and agriculture. Estimates for the first four months of 1998 suggest that economic activity has continued to grow at a brisk pace, with private trade, construction activities, and transport explaining most of the growth. The fiscal deficit (on a commitment basis) declined from 4.5 percent of GDP in 1996 to 4.1 percent in 1997, and the ratio of general government tax revenue to current expenditure increased from 56.6 percent to 66.3 percent, as tax administration measures, together with the introduction of the Tax Code in June 1997, boosted tax revenue. The current account deficit of the balance of payments widened from 9 percent of GDP in 1996 to 10 percent in 1997, mainly reflecting a rapid growth in imports associated with the construction and refurbishment of the "early oil" pipeline connecting Azerbaijan and the Black Sea. The nominal exchange rate against the U.S. dollar remained fairly stable throughout the period, averaging about lari 1.32 per U.S. dollar.

5. Performance under the 1997 ESAF-supported program was mixed, with various fiscal and trade policy commitments remaining unresolved by year-end. Also, the pace of structural reform slowed down somewhat in the second half of 1997, compared with a rapid start earlier in the year. At end-December 1997, Georgia met the revised financial benchmarks on external borrowing, external arrears, net international reserves, net domestic assets of the NBG, and net credit of the banking system to the general government.1 However, Georgia did not observe the ceiling on total domestic borrowing requirements of the general government and the various fiscal benchmarks specified under the program, including, inter alia, targets on total tax and excise tax revenue collections, expenditure allocations on health, and targets for the reduction of tax arrears and domestic expenditure arrears of the general government. Tax arrears amounted to nearly 30 percent of tax revenues as of end-December 1997, compared with a target of 10 percent agreed at the time of the mid-term review under the 1997 program. Domestic expenditure arrears of the general government were lari 70 million at end-December 1997 or three times as high as the level agreed during the mid-term review. Finally, the export ban on scrap metal remained in place by year-end despite the program's policy commitment to eliminate this trade restriction by end-May 1997.

6. During the first four months of 1998, efforts were made to correct program deviations registered by end-1997 and key policy measures were put in place to address commitments made under the 1997 program. Indeed, almost all end-April 1998 indicative targets under the Fund-monitored program were met, some with considerable margins. The indicative program target on total tax revenue was missed due in part to an underperformance of cigarette tax revenue collections, but the government has now developed a strategy to increase cigarette taxes during the rest of 1998 (see paragraph 12 and Annex I).

III. The Program for 1998

7. The main macroeconomic objectives of the 1998 program include: (i) an annual growth rate of 10 percent;2 (ii) an annual inflation rate of 6 percent (end-of-period); and (iii) a gross official reserves target of US$210 million by year-end, equivalent to 2.3 months of projected imports. Key to achieving the macroeconomic objectives will be a further reduction in the overall fiscal deficit (on a cash basis) from an estimated 3.8 percent of GDP in 1997 to 2.5 percent in 1998.3 The reduction in the overall fiscal deficit will result from an increase in tax revenue collections, while public expenditure will continue to increase moderately and domestic expenditure arrears will be eliminated by end-December 1998. Domestic financing of the 1998 fiscal deficit is targeted at 1.4 percent of GDP, including a sharp reduction in NBG net domestic financing of the budget (from lari 149 million in 1997 to lari 102 million in 1998). Net external financing will mainly reflect disbursements under the World Bank Structural Adjustment Credits and project financing, net of amortization payments and reduction in external arrears.

8. The 1998 program embraces a number of structural policies aimed at fostering the development of the private sector and sustaining economic growth. These policies include, in particular, the launching of urban and industrial land privatization; an acceleration of the medium- and large-scale enterprise privatization program; the reform of the civil service; further steps to restructure the energy sector; and further strengthening of commercial banks' prudential regulations. The program also targets a deepening of judicial reform to secure an effective implementation of the many laws enacted by the Georgian parliament during the last two years.

9. To gain credibility and strengthen the program's initial conditions, a number of policies have been implemented in the recent past as prior actions for Executive Board consideration of Georgia's request for a third annual ESAF arrangement. These policies include, inter alia: (i) the election of the Board of Directors of the NBG and the appointment of a president of the NBG; (ii) the elimination of outstanding government interest payments arrears to the NBG; (iii) the elimination of the export ban on scrap metal and its replacement with a temporary export tax to be removed no later than June 30, 1999;4 (iv) the repeal of the license fee on exports of logs within a comprehensive and enhanced environmental policy; (v) revoking Ivertbank's license and the initiation of liquidation of the bank's assets in order to honor depositors' claims; (vi) verification of satisfactory compliance by Agrobank of all banking prudential regulation requirements, including the capital adequacy ratio, together with the appointment of a new management and the submission to the NBG of a viable business plan, which would involve enforcing lending and cash flow management procedures in line with international standards; reducing Agrobank's fixed and variable costs; and upgrading the bank's clearing and payments settlement systems with the support of SBS-Agro; (vii) the implementation of a number of tax policy measures with an estimated revenue yield of lari 76 million for 1998 (see Annex I); (viii) sequestration of expenditure commitments equivalent to lari 48 million, compared to the 1998 budget approved by parliament; (ix) issuing the offering memorandum for the privatization of Telasi; and (x) amending the law on State debt to remove the requirement that the NBG be the borrower for external debts, and restore the role of the Ministry of Finance in negotiating external debts.

A. Fiscal Policy

10. As noted in paragraph 7, the 1998 program's fiscal objectives are to reduce the overall fiscal deficit (on a cash basis) to 2.5 percent of GDP, while improving the revenue raising capacity and the buoyancy of the tax system (including customs), and strengthening expenditure and budget control. Total revenue and grants are targeted to increase from 10.4 percent of GDP in 1997 to 12.8 percent in 1998, largely on account of improved tax administration, including a significant increase in taxpayers' compliance with the law. In order to respect the budget constraint, and thus prevent any further increase in expenditure arrears, we have reduced expenditure commitments by lari 48 million, compared with the original budget appropriation, nonetheless total (cash) expenditure and net lending will increase from 14.1 percent of GDP in 1997 to 15.2 percent in 1998.

11. Parliament recently amended the Tax Code which has resulted in a continuation and/or extension of tax exemptions as listed below. Following a short transition period, and to provide some time for producers to adjust to standard taxation throughout the economy, we will begin reversing the tax privileges in 1999. In particular, the VAT exemption in the agricultural sector--the largest sector in the economy and which has registered large growth rates--will be eliminated no later than April 1, 1999 and a land tax surcharge will be levied starting January 1, 1999. Also, the VAT rate on both wheat and domestically produced flour will be increased to the standard level of 20 percent in two steps to be completed by end-1999, while the customs duty on imported wheat will be levied at 12 percent starting January 1, 1999. Submission to parliament of the 1999 draft budget consistent with the program's macroeconomic objectives and containing the increase of the VAT rate on wheat and on domestically produced flour to 10 percent to become effective January 1, 1999, will be a prior action for the mid-term review of the third annual ESAF arrangement. Both VAT rates will be increased further to 20 percent by end-1999; this increase in rates will be included in the draft budget for the year 2000. In addition, the recent extension to allow 90 days for the payment of excises will be eliminated effective January 1, 1999. To avoid double taxation, once Russia changes to the VAT destination principle, Georgia will remove the current VAT exemptions on natural gas, electricity, and mazout. The recent reduction of customs duty from 12 percent to 5 percent, which became effective on May 1, 1998 on natural gas and electricity will be reversed by October 1998. Finally, the tax exemptions on concerts, movies, sporting events, and tourism will be eliminated on January 1, 1999. During the program period, no new tax exemptions will be introduced.

12. To increase cigarette tax collections during the second half of 1998, excise stamps on all cigarettes will be in effect by October 1, 1998.5 The effective implementation of excise stamps will significantly boost revenue as this measure will help combat fraud. Satisfactory overall revenue performance and, in particular, improved collection of cigarettes taxes through October 1998, will be factors in reconsidering the timing of the projected increase to 42 tetri per pack of the specific tax on cigarettes classes I and II at the time of the mid-term review. In considering the increase in excises on cigarettes, one of the factors to take into account will be the tax policy in neighboring countries.

13. The 1998 program will continue efforts to reform the tax and customs administration. To that end, it will target: (i) a broadening of the coverage of the Tax Inspectorate of Georgia (TIG)'s Large Taxpayer Unit to include taxpayers accounting for at least 50 percent of total tax revenues by end-October 1998;6 (ii) the computerization of tax declaration forms for profits, income, and excise taxes by end-1998; (iii) a continuation of the functional reorganization of the TIG; (iv) the elimination of the current policy of tax offsets by end-1998; (v) the issuance of tax identification numbers (TINs) for all individuals, with an objective of completion by end-1999; and (vi) a phased reduction of the outstanding stock of general government tax arrears (see Text Table 1, below). Tax arrears will be equivalent to 15 percent of tax revenue at end-1998. In addition, starting September 1998, the tax authority will conduct regular taxpayer surveys to identify and register nonfilers, and seek liquidation or file for bankruptcy all taxpayers with arrears to the TIG older than nine months.

Text Table 1. Georgia: General Government Tax Arrears7
Stock of Tax Arrears as ofIn millions of lari
May 1, 1998176
July 1, 1998163
October 1, 1998128
November 1, 1998114
January 1, 199988
April 1, 199968

14. Regarding customs administration, the 1998 program targets an improved surveillance for transit goods, including the establishment of a bank or financial guarantee system to ensure payment of customs duties and other taxes for goods which do not leave the country; a better monitoring of personal imports, including the setting of quantity limits on imports of selected commodities; and a strengthening of controls on all borders with neighboring countries. To increase the quality of the customs services, the program entails the computerization of the State Customs Department (SCD), the construction of basic physical infrastructure needed by the SCD, provided resources are forthcoming (both domestic and foreign), and the provision of technical and managerial training for customs officials throughout the year.

15. The 1998 program assumes privatization receipts of lari 35 million, including lari 5 million from the privatization of urban land.

16. Core to the fiscal program will be the implementation of a sound public expenditure policy aimed at improving expenditure priorities and strengthening budgetary control. Accordingly, the program will seek to: (i) eliminate all outstanding domestic expenditure arrears by end-December 1998 and avoid the accumulation of new arrears;8 (ii) reduce the number of budgetary positions in line with the recommendations from the ongoing civil service reform project; (iii) wages are scheduled to increase by 10 percent in the second half of 1998; and (iv) pensions and other social benefits are scheduled to increase by 10 percent in the second half of 1998. Also, no later than October 31, 1998, the program aims at: (i) expanding the treasury system in the Ministry of Finance to cover all central (i.e., republican) government revenue and expenditure accounts, outside higher education, and the accounts of all extrabudgetary funds, excluding Pension Fund accounts outside Tbilisi; (ii) complete the computerization of all regional treasury offices and the central treasury; (iii) establish an arrears monitoring unit within the central treasury; and (iv) introduce commitment accounting of the treasury system.9 The extension of the treasury management system to local budgets is scheduled to be completed no later than December 31, 1998. The Ministry of Finance will develop a centralized data base of all state government expenditure transactions, which will be reconciled against bank records, to promote fiscal transparency.

17. To strengthen expenditure control, the program includes a contingency plan for reducing expenditure commitments in the event that aggregate revenue during the year is lower than programmed. In particular, on the 25th day of each month, the Budget Department and the Treasury Department of the Ministry of Finance will decide jointly on any revisions to the program expenditure ceilings for the following month, taking into account revenue performance vis--vis the program during the current month and the monthly outlook for the resources available to the government (defined as the sum of tax and nontax revenue, external grants, and domestic and external financing). In the event of a revenue shortfall during the current month and/or changes in the revenue outlook for the following month, the Ministry of Finance would revise the monthly expenditure ceilings accordingly and notify immediately the spending units affected by the sequestration of expenditure.

18. The Government's social policies will continue to protect the poor through an improved targeting of the social safety net. To this end, expenditures on basic health and education have been increased from around 18 percent of total budgetary appropriations in 1997 to 21 percent in 1998, in line with understandings reached with the World Bank.

19. The government will seek to collect the credit that was extended to certain enterprises through on lending of loans from foreign creditors, including the Turkish Eximbank. The Georgian government will draw up a complete list of delinquent debtors by end-May 1998, and seek to collect a minimum of lari 3-4 million during 1998. Neither the government, nor the NBG, will provide any guarantees on the contracting of domestic debt during the program period.

B. Monetary and Banking Sector Reform

20. Monetary policy in 1998 will remain prudent to restrain inflation, lend support to the exchange rate, and increase international reserves. The NBG will also step up its efforts to increase the efficiency of its indirect monetary instruments and accelerate banking sector restructuring.

21. The 1998 program projects a year-on-year 8 percent decline in velocity of money on account of increased confidence in the lari. The projected growth in reserve money is conservative (12 percent in 1998) as the money multiplier is expected to increase further, reflecting ongoing reforms in the banking sector, which are likely to expand the scope for intermediation. Consistent with these targets, we have established quarterly limits through end-March 1999 for changes in net domestic assets of the NBG, the banking system's net claims on the general government, total domestic borrowing requirement of the general government, as well as the floor on net international reserve position; these are specified in Table 1 of the attached Technical Annex. To instill greater payments discipline, the 1998 financial program includes an automatic adjustor on net credit to the government for any shortfalls in interest payments due by the budget to the NBG (Technical Annex, paragraph 7).

22. During the last few years, exchange rate policy management has been geared toward maintaining a stable nominal exchange rate against the U.S. dollar. The policy objective has been to use the exchange rate as the nominal anchor against inflation. In 1998, exchange rate policy will remain unchanged. The NBG will continue to intervene in the foreign exchange market to prevent a depreciation of the lari, provided this is consistent with the NBG's international reserves target. In the case of capital inflows, the policy will be to build up reserves, but let the exchange rate appreciate in the event of inflationary pressures. The official exchange rate will continue to be set daily in line with the exchange rate in the TICEX and with a view to keeping it within a margin of less than one percent from the market rate.

23. During 1998, the NBG will continue to upgrade its indirect monetary instruments. The NBG will intervene in the interbank credit auction in line with its inflation and exchange rate objectives. To the extent possible, the NBG will minimize its credit interventions in the weeks in which the corresponding treasury bills auctions are held to avoid potential conflict with the latter instrument (i.e., round-tripping of funds) and foster a market determination of interest rates in the money market. Effective October 1, 1998, the NBG will introduce repurchase agreements (repos) and streamline the regulations on the Lombard facility in line with the recommendations of the Fund's Monetary and Exchange Affairs department (MAE). Reserve requirement ratios on bank deposits will remain unchanged at 12 percent.

24. The Georgian government will take the necessary steps to establish a secondary market for treasury bills in line with the recommendations of MAE. In this regard, the 0.1 percent stamp duty on secondary market transactions, together with the 0.1 percent stamp duty on transactions in the TICEX market, were removed on April 29, 1998. The TICEX will serve as the venue for the secondary market, and price data will be shared in a transparent manner.

25. The Georgian government remains committed to foster the development of an efficient and sound domestic banking system. The bank certification program introduced in November 1995 is nearly completed and the number of operating banks is now 48. To monitor the soundness of the banking system, the NBG will continue to carry on regular on-site and off-site examinations of all certified banks in 1998, remove the license of banks which persistently fail to comply with prudential regulations, and expedite the liquidation process of banks which had licenses withdrawn. For the largest 10 banks, the NBG will conduct comprehensive annual on-site inspections with quarterly follow-up inspections, and will require that annual audits be conducted by an international accounting firm. Also, the NBG will improve reporting requirements for commercial banks of their income and off-balance sheet statements, and systematize the production of bank surveillance reports by November 1, 1998. In this context, new report forms on banks' monthly financial data have been prepared by the NBG and will become mandatory for all banks effective January 1, 1999. It is expected that the new report forms will become available to the public on a regular and timely basis starting January 1999. In addition, for prudential regulation purposes, the NBG has already established a timetable for an increase in minimum capital requirements for licensed banks up lari 5 million by January 2001 (see Annex II) and the current 50 percent limit on total bank lending to insiders will be reduced to 25 percent effective July 1, 1998. Those banks whose total bank lending to insiders exceeds 25 percent as of July 1, 1998 will have until January 1, 1999 to meet the 25 percent ceiling. Noncompliance with the limit on total bank lending to insiders will be penalized with charges established by the NBG. The development, dissemination, and implementation of International Accounting Standards (IAS) for domestic commercial banks remain important objectives for the authorities.

26. Modernizing the payments and settlement system of banking sector transactions remains an important objective in the modernization of Georgia's financial markets. By mid-1997, the e-mail system--which had been operational between the NBG head offices and branches--was extended to most commercial banks and a platform connecting 16 commercial banks and the NBG independently to the Swift system was installed at the NBG. In 1998, the NBG will aim at further modernizing the payment system's settlement process, which will facilitate the development of a "same-day" interbank money market in Georgia.

27. The Georgian authorities will seek repayment of all outstanding guarantees issued by the NBG to domestic businesses prior to 1997 and the NBG will not provide any guarantees for imports during the program period.

C. External Sector Policies

28. As a result of signing agreements with China and Turkey, Georgia has now concluded its round of debt-rescheduling negotiations with all bilateral creditors. For 1998, Georgia will continue to pay US$8 million each quarter into the special account at the Netherlands Bank to remain current on interest on debt rescheduled by bilateral creditors. Georgia and Turkmenistan have agreed to enter into negotiations on further rescheduling of Georgia's debt. With the strengthening of Georgia's external debt-service payments capacity, we expect to increase our payments to creditors significantly over the medium term.

29. Given Georgia's high external debt burden, the government will abstain from contracting or guaranteeing new external debt with a maturity of five years or less and will strictly limit the contracting or guaranteeing long-term debt on non-concessional terms. The government will continue to ensure that the Debt Department of the Ministry of Finance obtains all relevant data on public and publicly guaranteed external obligations from all branches of the government and the NBG. The Ministry of Finance will continue to be responsible for approval of any new external borrowing contracted or guaranteed by the government, and will, inter alia, ensure that such borrowing complies with the program's zero ceiling with respect to the accumulation of external arrears on official debt, as well as the limits on nonconcessional borrowing set out under the program as specified in Table 1 of the attached Technical Annex.

30. The program targets a further liberalization of Georgia's exchange and trade systems. To that end, parliament has recently eliminated the export prohibition on scrap metal and the license fee on exports of logs (see paragraph 9). Before the policy on managing the forestry is fully elaborated, as an interim arrangement, the policy to issue licenses to entrepreneurs wishing to cut wood either for domestic production or for export will be to require the following: (i) a certificate verifying that the logging company is registered; (ii) bank notification of the solvency of the company; (iii) a statement indicating the volume and type of logs which the company intends to cut, and (iv) a certificate confirming that the company possesses the necessary cutting equipment. These licenses will be granted by a joint committee consisting of representatives from the Ministry of the Environment, the Ministry of Economy, and the Department of Forestry. The committee will also determine the maximum amount of timber that can be cut within specified areas. For those entrepreneurs wishing to export logs, a separate export license will be required, which will be granted automatically (i.e., within a maximum period of 15 days after submission of the necessary information) for the standard annual flat fee of lari 60. To receive such a license, an exporter would need to present (i) a license to cut wood; (ii) proof on an outstanding export contract, and (iii) a certificate of the origins of the wood. With the assistance of the World Bank, we will specify our long-term forestry environmental policy in the context of the National Forestry Management Plan scheduled to be presented to parliament by the end of 1998. At the time of the mid-term review, the government will simplify the procedure for exporting logs by eliminating the two-step process required to obtain a license to export logs. As a result, entrepreneurs will only need to obtain one license without specifying the final destination of the product.

D. Structural Reform

31. Progress with structural reform will be a key element of the 1998 program. The government's agenda in this area includes urban land and enterprise privatization, civil service reform, energy sector restructuring, and judicial reform.

32. Privatization of urban and industrial land will be preeminent in providing investment incentives to domestic and foreign entrepreneurs. This will give investors the right to own all the land associated with their business and to freely use this land (asset) when taking economic decisions and risks inherent to private businesses. Effective October 1, 1998, the parliament will adopt a law that privatizes land previously allocated to privatized enterprises, as well as land allocated to newly established firms.10 The land area to be privatized will be based on existing official data and updated information describing parcel boundaries. Effective October 1, 1998, the government will enact an instruction or mechanism that will: (i) register initial ownership rights of land parcels taking into account existing official records and data on parcel boundaries and usage rights; and (ii) register rights arising from subsequent transactions in enterprise land in a manner that is quick, inexpensive, and legally valid. By end-1998, the government will register the ownership rights of and issue registration certificates to at least 100 privatized enterprises.

33. Under the 1998 program, the Georgian government plans to accelerate the privatization of medium- and large-scale enterprises in line with understandings and timetable agreed with the World Bank staff in the context of SAC II.11 Also, to foster private-sector development and entrepreneurship in Georgia, the 1998 program targets a simplification of the existing licensing requirements by November 1998, notably by sharply reducing the number of activities requiring licenses; the establishment of an independent Securities and Exchange Commission by November 1998; the creation of a stock exchange by December 1998; the adoption of regulation on the operations of independent share registries by October 1, 1998; and the enactment of a law on Private Pensions no later than June 1998.

34. Establishing a lean, well functioning civil service is key in securing good governance. Accordingly, for 1998, the government intends to implement a range of measures aimed at revamping the quality of the civil service as a whole. These measures include: (i) conducting a census of general government sector employees by September 1998; (ii) reviewing the activities of four ministries (Education, Health, Telecommunications and Post, and Transport) by December 31, 1998; and (iii) developing a medium-term program by March 1999 to reduce the number of government workers to an efficient minimum and increase the real wages of most productive employees to levels comparable to those in the private sector. The above tasks will be carried on in coordination with the World Bank's project for the reform of the civil service in Georgia.

35. To forge energy sector restructuring, the government will: (i) adopt a new electricity tariff methodology and tariff-setting procedures no later than July 15, 1998; (ii) implement the revised electricity tariffs in accordance with the new methodology by end-December 1998; and (iii) initiate the privatization of electricity distribution companies, consistent with World Bank technical assistance in this area. Also, the government will take necessary steps to increase to 85 percent the annual collection rate of electricity payments in 1998 and adjust electricity tariffs to cost recovery levels by end-1998.

36. Launching the reform of the judicial system will also be critical in fostering private-sector development. To that end, the 1998 program targets a review of the implementation record of the many laws and regulations adopted since Georgia regained independence in 1992. This will require the development of an action plan for disseminating legal information to the judicial system and the public at large by end-1998, as well as the setting of a comprehensive strategy for judicial reform in coordination with the World Bank staff.

E. Statistics

37. The Georgian government remains committed to improving the quality of macroeconomic statistics, which would allow the design of leading economic indicators for monitoring the economy and implementing timely policy decisions. To that end, the National Accounts Department of the State Department of Statistics (SDS) is being restructured in line with the Fund technical assistance recommendations. Over the coming months, the SDS will work to develop adequate sources and methods for calculation of national accounts and also document them properly, particularly regarding estimates on the informal economy. The SDS will incorporate into the calculation of national accounts estimates of new data sources that have now been upgraded to capture elements of a market economy (i.e., the household survey, the producer price index, and other business accounting data). On government finance statistics (GFS), the report forms used by various levels of government for consolidating the accounts of the general government will be customized by end-1998 according to GFS classification methodology.

38. Regarding balance of payments statistics, the SDS will continue to cooperate with the customs department regarding the compilation of international trade data. Also, the SDS will regularly update the coverage of the business register and expand the coverage of specific surveys covering travel and tourism activities to improve the quality of the current account data. The Ministry of Trade and Foreign Economic Relations will undertake a quarterly survey of foreign direct investment in Georgia. Short-term external borrowing by domestic financial intermediaries residents remains very limited according to balance sheet monthly data provided by commercial banks to the NBG. The NBG will continue to monitor developments with these data and provide the IMF with timely updates on developments throughout the duration of the program (Technical Annex).

IV. Program Monitoring

39. Progress with the implementation of the program will be monitored on the basis of targets detailed in the attached Technical Annex. The quantitative and structural performance criteria and indicative targets, as well as the program's structural benchmarks, are specified in Table 1. The program will also include one review expected to be completed by December 1998.


1These targets were specified jointly by the Georgian authorities and the IMF staff in the context of the mid-term review of the 1997 ESAF-supported program.

2GDP estimates in Georgia are subject to considerable uncertainty. In cooperation with the IMF, the Georgian authorities are about to embark on a major overhaul on the compilation of national accounts statistics.

3Reclassifying privatization receipts from extrabudgetary revenue (i.e., above-the-line item) to domestic financing (i.e., below-the-line item) results in a change in presentation of the fiscal accounts. Under this alternative presentation of the fiscal data--which is more in line with practices in other countries in the region--the general government fiscal deficit (on a cash basis) is projected to decline from 4.0 percent of GDP in 1997 to 2.9 percent in 1998.

4 The temporary export tax will be assessed as a specific tax equivalent to an ad valorem rate of no more than 20 percent of the international price.

5Cigarette tax collections will be monitored through quarterly benchmarks and a performance criterion. The full implementation of excise stamps will be a structural performance criterion under the program.

6This measure is a structural performance criterion under the program.

7Tax arrears are defined as the unpaid tax obligations (of enterprises and/or individuals) to the TIG, the State Customs Department, the Pension Fund, the Employment Fund, and the Road Fund. For purposes of the program, the definition of tax arrears includes the unpaid tax obligations, inclusive of the fees, interest, and penalties charged on account late payments.

8 Priority will be given to the elimination of wage and pension arrears.

9Items (i), (ii), and (iii) are structural performance criteria under the program.

10 This measure will be a structural performance criteria under the program.

11 The privatization program agreed by the authorities in the context of SAC II includes the privatization, by mid-1998, of ninety-one medium-scale enterprises through cash auctions and at least 25 percent of the shares of a group of large-scale enterprises in heavy industry through various methods including investment tenders or leases with buy-out option.

 

Georgia: Technical Annex to the Statement of Economic and Financial Policies

1. Georgia's performance under the program from May 1, 1998 to April 30, 1999 to be supported by a third annual arrangement under the Enhanced Structural Adjustment Facility (ESAF) will be assessed by the Fund on the basis of observance of quantitative and structural performance criteria and benchmarks, and a mid-term review. This annex sets out and defines these criteria and benchmarks as well as monitoring and reporting requirements. The disbursement associated with observance of end-October 1998 performance criteria will also be contingent upon, inter alia, the completion of the mid-term review.

I. Quantitative Targets1

2. As defined below, quantitative quarterly targets have been established for net domestic assets of the NBG, net domestic bank credit to the general government, total domestic borrowing requirements of the general government, general government total tax revenue, cigarette tax revenue, external debt-service payments, net official international reserves, short-term external debt and the contracting of medium and long-term external debt. The program also contains a performance criterion on the non-accumulation of external arrears on official debt to be observed on a continuous basis. The targets for net domestic assets of the NBG, net domestic bank credit to the general government, total domestic borrowing requirements of the general government, and net official international reserves will be adjusted for deviations from programmed levels of balance of payments support as indicated in paragraph 7 of this technical annex and in footnote 2 of Table 1, which summarizes the quantitative targets. The targets established for end-October 1998 are performance criteria under the arrangement. The targets for end-June 1998, end-September 1998, end-December 1998, and end-March 1999 are benchmarks. In addition, quarterly quantitative financial benchmarks have been established on reserve money, minimum health expenditures of the republican government, and domestic expenditure arrears of the general government.

Limits on the net domestic assets of the NBG

3. Net domestic assets of the NBG are defined as reserve money (comprising currency in circulation, required reserves, and balances on domestic banks' correspondent accounts at the NBG) minus official international reserves of the NBG (as defined below). Thus defined, the NBG's net domestic assets consist of the NBG's gross credit to the general government minus deposits of the general government with the NBG, NBG's gross credit to domestic banks, and all other net assets of the NBG. From April 30, 1998, the increase in NBG's net domestic assets will not exceed lari 35.1 million as of June 30, 1998; lari 54.6 million as of September 30, 1998; lari 63.2 million as of October 31, 1998; lari 45.5 million as of December 31, 1998; and lari 62.5 million as of March 31, 1999.

Limits on net domestic bank credit to the general government

4. For purposes of the program, the general government is defined to comprise the republican and local budgets of Georgia, and the budgets of extrabudgetary funds: the Social Security Fund, the Employment Fund, the Road Fund, and the Privatization Fund. No new extrabudgetary funds will be created during the program period.

5. Net credit from the banking system to the general government for program purposes is defined as the sum of the banking system's claims (including the NBG claims) in lari and foreign currency (convertible and nonconvertible) on all parts of the general government as defined above, less the banking system's liabilities to the general government in lari and foreign currency as reported in the accounts of the banking system. Claims include bank loans and advances to the general government, as well as bank holdings of general government debt and treasury bills. NBG claims on all parts of the general government will be adjusted for deviations from programmed levels of government payments of domestic interest to the NBG. This adjustor to NBG claims on the government and the adjustor on net international reserves referred to in paragraph 2 are defined in paragraph 7 below.

6. From April 30, 1998, the increase in net credit from the banking system to the general government is not to exceed lari 38.5 million as of June 30, 1998; lari 64.2 as of September 30, 1998; lari 74.2 million as of October 31, 1998; lari 62.8 million as of December 31, 1998; and lari 82.9 million as of March 31, 1999.

7. The 1998 program includes two automatic adjustors to the various performance criteria and indicative benchmarks identified in Table 1. These adjustors are described below:

Adjustor on shortfalls and excesses of balance of payments support

8. The performance criteria and indicative targets for: (i) the ceilings on net credit of the banking system to the general government; (ii) the ceiling on net domestic assets of the NBG; and (iii) the floor of net international reserves (total NIR and NIR in convertible currencies) will be adjusted for differences between actual and programmed disbursements of balance of payments support (projected at US$85.3 million for the program period, see Table 1). Specifically, ceilings will be increased for shortfalls and decreased for excesses (floors will be decreased for shortfalls and increased for excesses), compared to the programmed disbursements of balance of payments support lending. For the case of SAC III, any shortfalls from projected disbursements of US$20 million for 1998 will result in an increase in: (i) net credit of the banking system to the general government, (ii) net domestic assets of the NBG, and (iii) the floor on net international reserves (total NIR and NIR in convertible currencies) equivalent to half of the amount of the shortfall.

Adjustor on shortfalls of government interest payments to the NBG

9. To instill greater payments discipline, the 1998 financial program includes an automatic adjustor on: (i) net credit of the banking system to the general government and (ii) net domestic assets of the NBG for any shortfalls in interest payments due by the budget to the NBG. The 1998 program assumes monthly interest payments due to the NBG of lari 4.6 million (see memorandum item in Table 1). Specifically, items (i) and (ii) will be decreased by any shortfall of government interest payments due to the NBG.

Limits on total borrowing requirements by the general government

10. Total borrowing requirements of the general government are defined as the sum of the increase in net credit from the banking system to the general government plus the increase in domestic nonbank borrowing by the general government, including nonbank holdings of treasury bills.

11. From April 30, 1998, the increase in total borrowing requirements by the general government are not to exceed lari 39.1 million as of June 30, 1998; lari 65.2 million as of September 30, 1998; lari 75.2 million as of October 31, 1998; lari 63.9 million as of December 31, 1998; and lari 84.1 million as of March 31, 1999.

Floor on external debt-service payments

12. Georgia will remain current on debt-service payments to bilateral official creditors. Cumulative payments of debt service from April 1, 1998 (excluding the agreed amounts of principal payments to Turkmenistan) to these creditors will not be less than US$8 million as of June 30, 1998; US$16 million as of September 30, 1998; US$16 million as of October 31, 1998; US$24 million as of December 31, 1998; and US$32 million as of March 31, 1999. The balance will be put into a special account with the Netherlands Bank.

Floors on the minimum stocks of total net official international reserves

13. For purposes of the program, there will be two floors for official international reserves. One floor will apply to the total net official international reserves. This will be calculated as the difference between total gross official international reserves of the NBG and total official reserves liabilities of the NBG. The second floor will apply to net official reserves in convertible currencies as defined below. This will be calculated as the difference between gross official reserves in convertible currencies of the NBG and reserve liabilities of the NBG in convertible currencies.

14. Total gross official international reserves of the NBG will be defined as the NBG's holdings of monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of convertible and nonconvertible currencies by the NBG. Excluded are capital subscriptions in foreign financial institutions and nonliquid assets of the NBG (beyond one year to original maturity), as well as balances held in the special account at the Netherlands Bank. Official gold holdings shall be valued at US$271 per ounce troy.

15. Gross official reserves in convertible currencies of the NBG shall be defined as the NBG's holdings of monetary gold, holdings of SDRs, any reserve position in the IMF, and holdings of convertible currencies by the NBG. Capital subscriptions in foreign financial institutions and nonliquid assets of the NBG are excluded. Balances held in the special account at the Netherlands Bank are excluded.

16. Official reserves liabilities of the NBG in convertible currencies will be defined as IMF purchases and disbursements, and convertible currency liabilities of the NBG to nonresidents, with an original maturity of up to and including one year. Excluded are liabilities arising from gold swaps, balance of payments support loans of maturity longer than one year, as well as loans from the European Union, the World Bank, and other international financial institutions excluding the IMF, foreign governments, and foreign banks.

17. Total official reserves liabilities of the NBG comprise all the items in the above paragraph plus all short-term official liabilities of the NBG to nonresidents in nonconvertible currencies with original maturities up to and including one year.

18. Thus calculated, the decline in the stock of net international reserves from April 30, 1998, shall not exceed US$22.5 million as of June 30, 1998; US$19.1 million as of September 30, 1998; US$21.9 million as of October 31, 1998; US$4.7 million as of December 31, 1998; and US$23 million as of March 31, 1999. Furthermore, the decline in the stock of net international reserves in convertible currencies from April 30, 1998, shall not exceed US$22.5 million as of June 30, 1998; US$19.1 million as of September 30, 1998; US$21.9 million as of October 31, 1998; US$4.7 million as of December 31, 1998; and US$23 million as of March 31, 1999.

Limits on short-term external debt outstanding

19. During the program period, neither the general government (as defined in paragraph 4 above) nor the NBG will contract or guarantee short-term external loans; quarterly ceilings are indicated in Table 1. Short-term debt includes all short-term obligations having as maturity of up to one year, including gold swaps, except for normal import-related trade credits. Excluded from the limit are new short-term obligations which may arise from the rescheduling operations on debts to nonresidents and credits extended under bilateral clearing arrangements and through correspondent accounts with other BRO central banks.2 Debt falling within the limit will be valued in U.S. dollars at the exchange rate prevailing at the time the contract or guarantee entered into effect.

Limits on the contracting or guaranteeing of nonconcessional medium- and long-term external debt

20. These limits, specified in Table 1, apply to new external loans contracted or guaranteed by the general government (as defined in paragraph 4 above) or the NBG, cumulative from April 30, 1998, including loans secured with escrow agreements with the government and the NBG, with an original maturity of more than one year. For purposes of these limits, debts are defined as nonconcessional if they have a grant element of less than 35 percent, calculated using the prevailing Commercial Interest Reference Rate (CIRR) for the currency of the loan as used by the OECD in assessing the concessionality of export credits. CIRRs are determined by the OECD on a monthly basis. The average of CIRRs over the last 10 years will be used as the discount rate for assessing the concessionality of loans of a maturity of at least 15 years. For loans with shorter maturities, the average of CIRRs of the preceding 6-month period will be used in assessing concessionality. To both the 10-year and 6-month averages, the same margins for differing repayment periods as those used by the OECD will be added: 0.75 percent for repayment periods of less than 15 years, 1 percent for 15-19 years, 1.15 percent for 20 to 29 years, and 1.25 percent for 30 years or more. Information on the CIRRs will be made available by the Fund staff through the Resident Representative's office. For the purpose of monitoring compliance with the targets, agreements concluded in respect of rescheduling of the existing debt shall be excluded from this limit. Also excluded from this limit is the use of IMF resources. There is also a sublimit on the contracting or guaranteeing of new external loans of maturities of 1 to 5 years.

External arrears

21. During the period of the program, neither the government nor the NBG will accumulate arrears on any external payments to official creditors other than on: (i) payments which Georgia's official creditors agree will not have to be made (including payments which have not been formally rescheduled but which creditors agree will not have to be made pending negotiation of a formal rescheduling); and (ii) pending continuing discussions between Georgia and Turkmenistan, principal payments due to Turkmenistan under the 1996 rescheduling agreement between Georgia and Turkmenistan, excluding principal payments that Georgia undertakes to make under the third annual arrangement.

II. Structural Performance Criteria and Benchmarks

22. Structural performance criteria and structural benchmarks for the period of the program are described below.

Structural performance criteria

23. The following measures and actions referred to in the Statement of Economic and Financial Policies are also specified as performance criteria to be implemented as indicated:

  • Implementation of excise stamps on all cigarettes by October 1, 1998.
  • Enact by end-October 1998 the law on urban and industrial land to allow, inter alia, private ownership of urban and industrial land.
  • Broadening of the coverage of TIG's Large Taxpayer Unit to include taxpayers accounting for at least 50 percent of total revenues by end-October 1998.
  • Expand the treasury system in the Ministry of Finance to cover all central (i.e., republican) government revenue and expenditure accounts, outside higher education, and the accounts of all extrabudgetary funds, excluding Pension Fund accounts outside Tbilisi, no later than October 31, 1998.
  • Complete the computerization of all regional treasury offices and the central treasury no later than October 31, 1998.
  • Establish an arrears monitoring unit within the central treasury by October 31, 1998.

Structural Benchmarks

24. The following measures and actions referred to in the Statement of Economic and Financial Policies are also specified as structural benchmarks to be implemented as indicated:

  • Reduce tax arrears to 15 percent of annual tax revenue of the general government (including extrabudgetary taxes) by end-December 1998.
  • Strengthen prudential requirements on commercial banks' minimum capital and insider lending.
  • Introduce repurchase agreements by the NBG and establish a secondary market for treasury bills effective October 1, 1998.
  • Adopt a new electricity tariff methodology and tariff-setting procedures no later than July 15, 1998, in line with the recommendations of the World Bank.
  • Implement the revised electricity tariffs in accordance with the new methodology by end-December, 1998, in line with the recommendations of the World Bank.
  • Set a timetable and initiate the extension of the treasury management system to local budgets no later than December 31, 1998.
  • Introduce commitment accounting of the treasury system effective end-October 1998.
  • Simplification of existing licensing requirements by November 1998.
  • Implement measures to improve compilation of general government statistics according to GFS methodology by end-1998.

III. Monitoring and Program Implementation

25. Close monitoring and an efficient dissemination of information, particularly between the Ministries of Finance and Economy and the NBG, will be essential to ensure that the program targets are met. To this end, a task force consisting of a member of each of these institutions will monitor developments, including progress in the implementation of structural benchmarks, and prepare timely reports for these institutions and the President's office.

26. Using information provided by the Ministry of Finance and the NBG, the task force will monitor revenues, expenditures, and financing of the general government on commitment and cash bases and will provide, on a monthly basis, the information requested to the Fund.

27. The NBG will be responsible for monitoring its foreign currency cash flow position on a daily basis, including all foreign currency receipts passing through the NBG (from purchases in the auction market and loans), all foreign exchange expenditures (debt service and sales in the auction market), and changes in the reserves position. Information on the changes in the net foreign reserves of the NBG will be used to monitor developments in money and credit aggregates, and deviations will be reported to allow for timely corrective action to be taken, if necessary.

28. The Debt Department in the Ministry of Finance will provide a task force with monthly statements summarizing the external debt position and debt-service payments falling due. In this manner, the NBG will report back to the Ministry of Finance on debt-service payments made, so that the debt reporting unit can be fully apprised of the state of external obligations.

IV. Reporting Requirements

29. The government and the NBG will regularly provide the Fund with the necessary economic and financial statistics data. Unless otherwise stated, data are monthly and are to be reported to the Fund by the 15th day after the end of the month.

Monetary data

  • A balance sheet of the NBG, a balance sheet of the rest of the banking system, and an aggregate balance sheet of the banking system for the last day of each month.
  • A detailed breakdown showing the composition of gross reserves and foreign liabilities reported in the NBG balance sheet in accordance to the definitions set out earlier. The information on gross reserves and foreign liabilities will indicate amounts in the currencies in which they are denominated and also in lari.
  • Banking sector prudential regulation statistics.

Fiscal accounts and related data

  • Consolidated accounts of the general government, as defined above.
  • Receipts and expenditures of all extrabudgetary funds (the Social Security Fund, the Employment Fund, the Road Fund, and the Privatization Fund).
  • Expenditure arrears of the general government.
  • Tax arrears of the general government, inclusive of late payments of payroll taxes due to the Social Security Fund.

External operations and debt

  • The end of month stock of short-term debt contracted or guaranteed by the government and the NBG, by creditor in terms of U.S. dollars.
  • The end of month stock of medium- and long-term debt contracted or guaranteed by the Government and the NBG, by creditor in terms of U.S. dollars.
  • Data on debt service due and paid (including those items related to other BRO states) and the stock of outstanding arrears on debt-related payments.
  • Confirmation that the limits on contracting and guaranteeing nonconcessional medium- and long-term debt have been observed.
  • Daily information showing the lari/U.S. dollar and comparable rates in the TICEX market and in other markets (e.g., foreign exchange bureaus).
  • Daily information showing the volumes of sales and purchases of foreign exchange by the NBG in the TICEX, broken down by currency and by buyer/seller (NBG and commercial banks).

Other data

  • Monthly consumer price index (CPI) and producer price index (PPI) data.
  • Quarterly gross domestic product data.
  • Quarterly data on exports and imports of goods and services.


1For program purposes, quantitative targets will be evaluated using fixed accounting exchange rates of lari 1.335 per U.S. dollar and US$1.34666 per SDR.

2BRO stands for the Baltic countries, Russia, and other states of the former Soviet Union.


 
Georgia: Tax Measures and Estimated Revenue Yields
Measure Implementation Date Revenue Yield during 1998
Introduction of a presumptive income tax on small business June 1, 1998 lari 7.3 million
     
Increase in ad valorem excise duty on gasoline from 15 percent to 60 percent June 1, 1998 lari 35.5 million
     
Introduction of an "environmental" tax on diesel, mazut, kerosene, and liquid gas June 1, 1998 lari 9.2 million
     
Introduction of a temporary specific tax on exports of scrap metal July 1, 1998 lari 9 million
     
Introduction of a specific tax of 7 tetri per pack on reexports of cigarettes April 15, 1998 lari 8 million
     
Introduction of licensing requirements for wholesale manufacturing and trading of cigarettes July 31, 19983 lari 5 million
     
Taxation of alcoholic beverages:4    
     
(i) Removal of the system
of reference prices and introduction of specific taxes (customs tariff, excise duty and VAT) on imported alcoholic beverages
May 1998 lari 1 million
     
(ii) Introduction of a specific excise duty on domestically produced alcoholic beverages (VAT to remain on ad valorem basis) May 1998 lari 1 million
     
Total   lari 76 million


3Presidential Decree # 391 was issued on June 28, 1998.

4Owing to data limitations, it is difficult to disaggregate the revenue impact between domestic and imported alcoholic beverages.

 

Georgia: Minimum Capital Licensing Requirements
For New Banks Lari 5 million
   
For Licensed Banks December 31, 1998 -- lari 1 million
June 30, 1999 -- lari 2 million
December 31, 1999 -- lari 3 million
June 30, 2000 -- lari 4 million
December 31, 2000 -- lari 5 million
Source: National Bank of Georgia

 

Table 1. Georgia: Quantitative Indicative Targets and Financial Benchmarks, April 1998-March 1999 1/

 

Stock at
end-April
1998

  Cumulative changes from end-April 1998
   

end-June 1998

end-Sept. 1998

end-Oct. 1998

end-Dec. 1998

end-Mar. 1999

     

(in millions of lari)

1. Performance criteria 1/

             
               

Ceiling on net credit of the banking system to the General Government 2/ 3/

439.0
 
38.5
64.2
74.2
62.8
82.9

 

 

 

 

 

 

 

 

Ceiling on net domestic assets of the NBG 2/ 3/

423.2

 

35.1

54.6

63.2

45.5

62.5

               

Ceiling on total domestic borrowing requirements of the General Government 2/ 3/

443.3

 

39.1

65.2

75.2

63.9

84.1

               

Floor on tax revenue (including special funds) 4/ 5/

--

 

338.0

570.0

642.0

820.0

1,010.0

               
Floor on cigarette tax revenue 5/

--

 

9.7

22.3

27.5

38.0

54.0

               
     

(in millions of U.S. dollars)

               

Ceiling on contracting or guaranteeing

             

short-term external debt

             

(less than one year) 6/

--

 

--

--

--

--

--

               

Ceiling on contracting or guaranteeing

             

nonconcessional medium- and long-term

             

external debt

             

Maturities above 1 year

--

 

41.0

82.0

82.0

82.0

94.0

Of which:

             

Maturities from 1 to 5 years

--

 

--

--

--

--

--

               

Ceiling on external arrears 7/

20.0

 

40.0

--

--

--

--

               

Floor on total net international reserves of the NBG 2/

-114.0

 

-22.5

-19.1

-21.9

-4.7

-23.0

               

Floor on net international reserves in

             

convertible currencies of the NBG 2/

-113.6

 

-22.5

-19.1

-21.9

-4.7

-23.0

               

Floor on external debt-service payments 8/

--

 

8.0

16.0

16.0

24.0

32.0

               

2. Financial benchmarks

   

(in millions of lari)

               

Reserve money

271.0

 

5.0

29.1

34.0

39.2

31.8

               

Minimum amount of health expenditures of the

             

Republican Government

--

 

29.8

45.9

52.1

62.9

               

Domestic expenditure arrears of the Govt.

43.7

 

25.0

5.0

4.0

0.0

0.0

               

Memorandum Items

   

(in units as indicated)

               

Net disbursement of balance of payments

             

support lending (in millions of U.S. dollars)

 

0.0

18.8

28.7

74.3

85.3

               

Accrued government interest payments to the NBG (in millions of lari)

  9.6 24.2 29.2 39.1 54.1

1/ Based upon program exchange rates (1.335 lari/US$ and 1. 34666 US$/SDR). Targets for end-June 1998, end-September 1998 end-December 1998 and end-March 1999 are quantitative benchmarks.

2/ Ceilings will be increased for shortfalls and decreased for excesses (floors will be decreased for shortfalls and increased for excesses), compared to the program projections in net disbursements of balance of payments support lending as indicated in the memorandum item of this table; however, shortfalls for the first tranche disbursement of SAC III (US$20 million) scheduled for December 1998 will be accommodated only up to US$10 million (lari 13.35 million).

3/ These ceilings will be adjusted downward for any shortfall in general government interest payments due to the NBG.

4/ Includes central government budget and special State funds. The later include the Pension, Employment, and Road Funds. Privatization revenue is excluded.

5/ Cumulative from January 1, 1998.

6/ Excludes short-term obligations from the bridging loan operation for the EU Loan Agreement.

7/ External arrears at end-April and end-June 1998 of US$20 million and US$40 million, respectively, reflect nonpayment by Georgia of the first and second quarterly principal payment to Turkmenistan due at end-March and end-June 1998. The Georgian authorities have officially requested a rescheduling of principal falling due to Turkmenistan through May 1, 1999. The external payments arrears subject to this performance criterion exclude payments described in paragraph 21 of the Technical Annex to the Statement of Economic and Financial Policies.

8/ These are quarterly payments of US$8 million to be paid to bilateral creditors on account of rescheduling agreements concluded already, with the balance put in a special account with the Netherlands Bank.