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Georgia and the IMF

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Public Information Notice (PIN) No. 04/4
January 30, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Reviews Georgia's Performance Under Past Fund-Supported Programs

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On January 21, 2004, the Executive Board of the International Monetary Fund (IMF) reviewed Georgia's experience with two Fund-supported programs since 1996, under the new guidelines on assessments of countries with a longer-term program engagement.1

Background

Georgia has faced daunting challenges since independence, in an environment rife with political tension, declining living standards, and severe economic dislocations. Dwindling tax revenues in the first years of independence have reduced the government's ability to fund basic state functions, while the de facto secession of two provinces has undermined its control over the country's territory. In the face of these obstacles, Georgia has had to build basic national institutions and embark on fiscal consolidation and first-generation reforms, including privatization, land reform, and energy sector rehabilitation. While progress has been made in the context of the last two Fund-supported programs, the results fell short of expectations during the recent Poverty Reduction and Growth Facility arrangement, which expired on January 11, 2004.

Executive Board Assessment

Executive Directors welcomed the opportunity to review—under the guidelines on assessments of countries with longer-term program engagement—Georgia's experience with two Fund-supported programs since 1996. Directors commended Georgia for the pursuit of sound macroeconomic policies and the progress made with some structural reforms over the past eight years. As a result, Georgia has made notable advances toward macroeconomic stabilization, liberalization of the trade and payments system, and implementation of substantial financial sector reforms.

Directors observed, however, that important program goals, including the strengthening of the public finances and sustained implementation of structural reforms, remain unrealized. They agreed that the weaknesses in program implementation and institutional capacity that had characterized both Fund-supported programs stemmed in large part from ongoing governance problems and pervasive corruption, the influence of vested interests, as well as limited program ownership by the authorities. Today Georgia remains a very poor country with significant macroeconomic vulnerabilities, as well as a large, unfinished agenda for transition to a market economy.

Directors welcomed the work done by the staff to pinpoint key policy challenges facing Georgia and draw lessons learned on program design, based on its review of the country's past performance under Fund-supported programs. They agreed that in order to sustain economic growth, encourage private sector development, and reduce poverty, the highest priority should be to tackle the root causes of poor governance and pervasive corruption, and to build institutions well equipped to undertake these tasks. At the same time, the authorities will need to address the key macroeconomic challenge of pushing ahead with fiscal consolidation-paying particular attention to strengthening revenue performance and improving public expenditure policy and management. Also critical will be determined implementation of the structural reform agenda, particularly with respect to the energy sector, civil service reform, state property management, and further trade liberalization. Actions to normalize relations with creditors and improve the business climate will also be important. In looking at lessons learned from the program experience in Georgia, some Directors felt that such an assessment could benefit also from broader treatment of program design and conditionality issues. Directors welcomed the fact that the new administration in Georgia had reviewed the staff's assessment and shared its conclusions.

Directors discussed possible modalities of future Fund engagement with Georgia. A few Directors, recalling the uneven policy implementation in recent years and the still weak institutional capacity, called for special attention to be paid to the challenge of establishing a firm track record of policy implementation in combination with strong and broad-based ownership. These Directors suggested that a staff monitored program could provide an appropriate framework for assessing policy implementation going forward. Most Directors, however, encouraged the staff to engage the new authorities in response to their request for a successor PRGF arrangement. Based on staff's findings, the Board will come back to consider a possible arrangement if it is founded on realistic, but sufficiently robust and credible, policy commitments designed to tackle the enormous challenges still facing the country. These commitments should include fiscal consolidation, bold measures to tackle corruption and governance weaknesses, and progress on the structural reform agenda. A few Directors suggested that prior actions in some of these areas should be considered.

Directors encouraged staff to work closely with the new administration, and in collaboration with the World Bank staff, to develop a program, taking into account the lessons learned on conditionality and program design from today's discussion and the earlier arrangements. They acknowledged that renewed Fund involvement would capitalize on the window of opportunity presented by political change in the country to underpin more rapid economic growth and poverty reduction, by providing much-needed support and by helping to mobilize foreign assistance.



Georgia: Selected Economic and Financial Indicators, 1999-2003


   

1999

2000

2001

2002

2003
Est.


             
 

(Percentage change relative to previous year, unless otherwise indicated)

             

National income and prices

         

Nominal GDP

12.4

6.1

10.4

12.2

12.4

GDP at constant prices

3.0

1.9

4.7

5.3

7.0

Nominal GDP (millions of lari)

5,665

6,013

6,638

7,448

8,368

Consumer price index, period average

19.1

4.0

4.7

5.6

4.8

Consumer price index, end-of-period

10.9

4.6

3.4

5.4

7.0

             

Money and credit (end-of-period)

         

Reserve money

18.8

26.8

9.9

18.4

15.3

Broad money (including foreign exch. deposits)

20.7

39.0

18.5

17.9

29.1

             

Gross international reserves

         

In months of imports of goods and services (excl. pipeline imports)

1.3

1.0

1.4

1.8

1.5

In millions of U.S. dollars

132

109

161

198

183

             
   

(In percent of GDP)

             

General government

         

Total revenue and grants

15.4

15.2

16.3

15.8

15.6

o/w Tax revenue

13.8

14.2

14.3

14.4

14.4

Total expenditure and net lending

22.1

19.2

18.3

17.8

18.4

o/w Current expenditure

20.0

18.2

16.5

15.7

16.6

Primary balance

-3.9

-1.0

-0.2

0.0

-0.7

Fiscal balance, commitment basis

-6.7

-4.0

-2.0

-2.0

-2.9

Net change in expenditure arrears

...

1.4

0.2

-0.4

1.2

Statistical discrepancy

...

0.1

0.1

0.5

0.5

Fiscal balance, cash basis

-5.0

-2.6

-1.6

-1.9

-1.1

Financing

5.0

2.6

1.6

1.9

1.1

Privatization

0.9

0.3

0.1

0.2

0.3

External

1.7

0.0

1.9

1.8

0.9

Domestic

2.3

2.2

-0.4

-0.1

0.5

Adjustment for net withheld Adjara transfers 1/

0.0

0.0

0.0

0.0

-0.6

             

External sector

         

Trade balance

-19.1

-13.0

-15.2

-12.9

-17.6

Trade balance excluding pipeline-related imports

-19.1

-13.0

-15.2

-12.6

-12.0

Current account balance

         

Excluding transfers

-14.3

-11.2

-13.6

-11.4

-16.5

Including transfers

-7.8

-4.4

-6.5

-6.0

-10.1

Net change in external arrears

2.0

2.2

0.2

0.0

1.2

External debt

60.9

53.0

53.5

54.8

48.0


Sources: Georgian authorities; and IMF staff estimates.

1/ For 2003, deposits by the government of Adjara at commercial banks that reflect withheld tax revenues

are excluded from net financing of the government.


1 This PIN summarizes the views of the Executive Board as expressed during the discussion based on the staff report.




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