Press Release No. 95/37

The International Monetary Fund today approved a 12-month stand-by credit for the Republic of Georgia totaling the equivalent of SDR 72.15 million (about $113 million), together with a second drawing of SDR 27.75 million (about $44 million) under the systemic transformation facility (STF),¹ to support the Government's economic stabilization and reform program. The first drawing under the STF, also of SDR 27.75 million, was approved on December 15, 1994 (see Press Release No. 94/88).

Background

Georgia's economy was on the brink of collapse in late 1993 and early 1994. Three years after independence, the country had suffered a severe decline in recorded output, totaling 35 percent in 1994 alone; large financial imbalances leading to hyperinflation and massive currency substitution; a near collapse of the institutional capacity of the Government; and a disintegration of public infrastructure.

An STF-supported program launched by the Georgian authorities in the second half of 1994 has had remarkable success in halting hyperinflation and stabilizing the exchange rate. A drastic change in the stance of monetary policy, supported by strong measures to strengthen public finances -- principally the elimination of extensive consumer subsidies -- and the availability of external financial assistance were essential to this success. The authorities have also made important strides with structural reforms, including liberalization of nearly all prices, and of most trade and current account transactions, downsizing of government, and privatization of small-scale enterprises.

The 1995-96 Program

The economic program for 1995-96, which the stand-by credit and the second STF drawing support, seeks to consolidate the recent stabilization gains and reduce inflation to less than 1 percent a month by end-1995, holding the annual inflation to 12-15 percent in 1996; to contain the drop in output to 5 percent in 1995 and allow for 10 percent growth in 1996; and to raise international reserves to the equivalent of two months of imports by mid-1996.

To these ends, the program calls for a reduction of the fiscal deficit, on an accrual basis, to 6 percent of GDP in 1995 and 5.6 percent of GDP in 1996, from nearly 17 percent in 1994, through a determined effort to improve revenue performance and continued implementation of a tight expenditure program. Tax revenue is projected to rise to 4 percent of GDP in 1995 and 6 percent in 1996, from 3 percent in 1994, primarily through stronger tax administration, as well as a number of tax policy measures. Monetary policy will be designed to maintain price stability and safeguard the value of the national currency, thus improving conditions for the successful introduction of a new currency, the lari, in the next few months.

Structural Reforms

Under the program, the privatization of small-scale enterprises and the State Bread Corporation will be completed by end-1995, and voucher privatization of larger enterprises will be completed by mid-1996. The Government also intends to establish the legal structure that will support the transition to a market-based economy, including laws regarding property rights, contracts, bankruptcy, banking, competition policy, and foreign investment. A major downsizing of state institutions is already under way and should bring the number of government employees by end-August to below 420,000 people, or 25 percent less than in 1994. This reduction in the size of state institutions is expected to improve efficiency and increase real wages over time. Energy prices have recently been freed and henceforth will be market determined. The government has disengaged itself from the energy sector, and will no longer import gas under intergovernmental agreements.

Addressing Social Costs

In view of the economic crisis, financial assistance to the poor and disadvantaged is limited. The social safety net provides, however, minimal cash benefits to half of the population, including pensioners, the unemployed, children, refugees, students, single mothers, and state employees at the bottom of the wage scale.

The Challenge Ahead

While the initial results have been impressive, stabilization in the Republic of Georgia remains fragile because of uncertainties in fiscal performance and external financing. The role of the Government in a market- based economy has yet to be defined; problems of the banking system must be addressed; and structural reforms need to be accelerated, including privatization of medium- and large-scale enterprises. On the external side, normalization of relations with external creditors is critical.

Georgia joined the IMF on May 5, 1992, and its quota² is SDR 111.0 million (about $174 million). Its outstanding use of IMF credit currently totals SDR 27.75 million.

Georgia: Selected Economic Indicators   1994* 1995** 1996**   (percent change) Real economic growth –35.0 –5.0 10.0 Consumer price index     (end of period) 7,380.0 22.0 12.0     (percent of GDP) Government budgetary balance (deficit –) –16.5 –6.0 –5.6   (months of nongrant imports) Gross international reserves (end of period) 0.8 1.5 2.0 Sources: Georgian authorities; and IMF staff estimates. *Estimated for program year April 1, 1994–March 31, 1995 **Projected for program period April 1, 1995–March 31, 1998   1. The STF is a temporary financing facility to provide assistance to member countries facing balance of payments difficulties arising from severe disruptions in their traditional trade and payments arrangements owing to a shift from significant reliance on trading at nonmarket prices to a multilateral market-based trading system. 2. A member's quota in the IMF determines, in particular, its subscription, voting weight, access to IMF financing, and allocation of SDRs.