Georgia and the IMF
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"An IMF team visited Georgia February 25-March 7, 2005 to review recent developments and hold discussions for the second review under the government's IMF-supported economic program. The mission met with Prime Minister Nogaideli, the Ministers of Finance, Economy, and Energy, the State Minister for Economic Reform, the President of the National Bank of Georgia, and other senior officials.
"Georgia's macroeconomic performance continues to be strong. Output growth in 2004 was rapid, although the current estimate for real GDP growth (8.4 percent) may be overstated because of methodological problems and legalization of previously unrecorded transactions. Fiscal performance in 2004 was impressive, especially the improvement in revenue collections stemming from stronger tax enforcement. This permitted two supplementary increases in spending appropriations and faster-than-expected clearance of domestic arrears. In addition, important measures were introduced to strengthen fiscal institutions in an effort to ensure that the improvements are sustained.
"The mission team noted that large capital inflows, prompted mostly by greater investor confidence, have complicated the conduct of monetary policy since early 2004. In response, the National Bank of Georgia (NBG) has undertaken largely unsterilized interventions in the foreign exchange market and maintained a largely accommodating monetary stance. As a result, 12- month consumer price inflation has risen from a low of 3.6 percent in June 2004 to 7.5 percent at end-December (compared with a program target of 5 percent) and to 9.2 percent at end-January 2005. Weather-related crop shortfalls and higher international oil prices also appear to have played a part in rekindling inflation.
"The mission observed good progress in implementing structural reforms, including passage of a comprehensive tax reform. Energy sector reforms, especially the rehabilitation of infrastructure and rising utility bill cash collections, helped lower the sector's quasi-fiscal deficit from 5 percent of GDP in 2003 to an estimated 4½ percent in 2004. The banking sector has been further strengthened and an ambitious civil service reform launched.
"Also, the mission found that the recent sale of state enterprises for an amount equivalent to 3.5 percent of GDP bodes well for the government's effort to enhance market-based growth prospects. At the same time, smooth absorption by the economy of these additional resources poses challenges for macroeconomic management. The mission advised the authorities to utilize these extraordinary receipts gradually to forestall destabilizing effects, such as a spike in inflation, an abrupt additional real appreciation of the currency, or crowding out the private sector's access to bank credit. The mission took note of the authorities' plan to propose a supplementary budget to parliament envisaging full utilization of these extraordinary receipts, thereby increasing the government cash deficit to around 5.7 percent of GDP for 2005. By contrast, the mission recommended a more moderate increase in expenditures, accompanied by additional efforts to bolster tax receipts, which would limit the deficit to a range of 4 to 4½ percent of GDP in 2005. This latter approach would be supportive of the NBG's efforts to keep inflation in check and avoid an abrupt weakening in external competitiveness.
"Regarding structural reform, the mission welcomed the government's determination to intensify efforts to strengthen the energy sector, add momentum to privatization, civil service reform and modernization of the financial system, and institutionalize fiscal reforms. The government's plans to improve the business climate are sound and the mission urged the authorities to expose domestic producers to increased competition, which could play an important supporting role in enhancing the country's growth prospects and benefiting consumers.
"Program discussions, which are slated to continue in Washington in April, will focus on prospects for reaching a consensus on the fiscal stance and, more generally, the macroeconomic policy mix appropriate to Georgia's circumstances."
IMF EXTERNAL RELATIONS DEPARTMENT