Statement by an IMF Mission to Georgia

Press Release No. 06/181
August 18, 2006

An International Monetary Fund (IMF) staff mission led by Mr. John Wakeman-Lin issued the following statement today in Tbilisi:

"A mission of the International Monetary Fund (IMF) visited Georgia during August 11-18 to review recent economic developments and assess progress with the implementation of the government's economic reform program. This reform program is being supported by the IMF under its Poverty Reduction and Growth Facility (PRGF). The visiting mission met with senior government officials and parliamentarians.

"Although Georgia's economic growth performance continues to be strong, the economy is now characterized by significant inflationary pressure. Whereas twelve-month inflation was about 6 percent as of end-April 2006, by the end of July inflation had accelerated to 14.5 percent. The sharp increase in inflation reflects demand pressures in the economy resulting mainly from excess money supply. The current level of inflation is well above the program's targets and poses a serious risk to macroeconomic stability.

"The mission urged the authorities to tighten the current fiscal and monetary stances. The combination of expenditure restraint, a smaller deficit and slower growth of reserve and broad money would help reduce demand pressures. To this end, understandings were reached that would limit the overall fiscal deficit to 1.8 percent of GDP. Taken together, these measures should reduce inflationary pressure during the remaining months of 2006 and improve prospects of achieving end-2006 inflation of around 10 percent. For 2007, efforts to reduce inflation will be intensified.

"The mission welcomed efforts to secure reliable supplies of energy for the near term, but urged the government to be mindful of the macroeconomic risks still posed by strained economic relations with Russia. Against this background, the mission noted that such risks constitute another rationale for implementing a cautious fiscal stance that allows greater accumulation of international reserves.

"The mission welcomed the authorities' commitment to begin introducing a targeted poverty reduction program later this month. It also welcomed the ongoing improvement in bank supervision by the National Bank of Georgia. In this context, the mission stressed the need for prompt introduction of effective "fit and proper" criteria for bank owners, managers and administrators.

"Based on the understandings contained in the government's Memorandum of Economic and Financial Policies, the IMF mission plans to recommend completion of the fourth review under the PRGF arrangement, provided that macroeconomic management in the remainder of the third quarter is satisfactory. It is anticipated that completion of the fourth review will be considered by the IMF's Executive Board in late September 2006."



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