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5/17/13

IMF Program Note on Georgia

PROGRAM NOTE

Georgia
Last  Updated:  March  22,  2013 Current  IMF-­Supported  Program A  24-­month  Stand-­By  Arrangement  (SBA)  and  a  24-­month  arrangement  under  the  (concessional) Stand-­By  Credit  Facility  (SCF)  were  approved  by  the  IMF's  Executive  Board  on  April  11,  2012.  Under the  program,  Georgia  will  have  access  to  IMF  credits  of  up  to  SDR  250  million  (250  percent  of  quota, or  about  US$386  million),  evenly  divided  between  the  two  arrangements.  The  authorities  are  treating the  program  as  precautionary,  and  accordingly  did  not  request  the  disbursement  of  the  SDR  130 million  made  available  since  the  completion  of  the  first  and  second  reviews  on  March  13,  2013. Performance  under  the  program  is  monitored  through  semi-­annual  reviews.  The  third  review  mission is  tentatively  scheduled  for  September  2013.

Background
The  approval  of  the  new  arrangements  took  place  less  than  a  year  after  the  successful completion,  in  June  2011,  of  the  SBA  approved  in  September  2008.  The  economic  and financial  policies  implemented  under  the  SBA  were  successful  in  stabilizing  the  economy after  the  August  2008  armed  conflict  and  the  global  economic  downturn,  and  in  restoring conditions  for  strong  economic  growth:  In  the  first  phase  of  that  program,  a  sizeable  fiscal  stimulus  package,  financed  by  donors and  liquidity  injections  into  the  banking  system,  helped  mitigate  the  impact  of  the  twin crises.  In  its  second  phase,  the  focus  turned  to  restoring  investor  confidence  and,  with  it,  the basis  for  sustained  private  sector–led  economic  growth.  This  was  achieved  primarily through  fiscal  consolidation  (the  government  deficit  was  reduced  to  3.6  percent  of  GDP in  2011  from  9.2  percent  of  GDP  in  2009);;  allowing  more  exchange  rate  flexibility;;  and strengthening  the  monetary  policy  framework  as  well  as  the  regulatory  framework  of  the financial  system.  Georgia  successfully  returned  to  market  financing  in  April  2011,  with  a 10-­year  US$500  million  Eurobond  issue,  priced  favorably  at  a  yield  of  7.125  percent.  This was  followed,  in  early  2012,  by  successful  Eurobond  issues  by  Bank  of  Georgia,  Georgian Railways  and  Georgian  Oil  and  Gas  Corporation. Despite  a  slowdown  at  the  end  of  the  year  stemming  from  the  uncertainty  related  to  the October  parliamentary  elections  and  the  ensuing  political  transition,  Georgia’s  overall economic  performance  in  2012  was  strong.  Growth  reached  6.1  percent,  driven  by manufacturing,  construction,  tourism,  and  financial  services.  As  a  result,  the  unemployment rate  is  expected  to  have  declined  further,  down  from  15.1  percent  in  2011.  Inflation continued  to  fall,  to  -­1.4  percent  at  end-­2012  from  its  peak  of  almost  15  percent  in  May 2011,  helped  by  lower  food  and  energy  prices  and  lari  appreciation.  The  external  current account  deficit  remained  high,  though,  at  12  percent  of  GDP,  reflecting  an  increase  in  the trade  deficit  to  26  percent  of  GDP,  which  was  offset  by  increases  in  tourist  receipts  and
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IMF Program Note on Georgia

investment  income.  Stronger-­than-­expected  capital  inflows  financed  the  high  current  account deficit,  allowing  the  National  Bank  of  Georgia  to  accumulate  international  reserves  above  its target,  to  US$2.9  billion  (3.6  months  of  projected  2013  imports)  by  end-­year. The  outlook  for  2013  remains  broadly  favorable,  with  the  economic  slowdown  observed  in late  2012  expected  to  be  temporary,  and  inflation  to  remain  well  below  the  central  bank’s target.  Further  fiscal  consolidation,  exchange  rate  flexibility,  and  structural  reforms  aimed at  boosting  Georgia’s  competitiveness  should  contribute  to  reducing  the  current  account deficit.

Role  of  the  IMF
Although  Georgia  has  rebounded  well  from  the  twin  crises  of  2008–09,  its  large  current account  deficit  and  external  financing  needs  remain  a  source  of  vulnerability,  particularly against  a  background  of  unsettled  international  economic  and  financial  conditions.  In  this context,  the  main  objectives  of  the  current  arrangements  with  the  IMF  are  to:  Support  the  authorities’  economic  and  financial  program  for  2013–14,  which  aims  at completing  Georgia’s  post-­crisis  macroeconomic  adjustment  process;; Further  strengthen  market  confidence  and  catalyze  continued  financial  support  by  donors;; and  Provide  precautionary  access  to  IMF  resources  to  cover  potential  balance-­of-­payments gaps  in  the  event  downside  risks  materialize. The  economic  program  is  based  on  the  following  macroeconomic  policies: Further  fiscal  consolidation  (the  fiscal  deficit  is  targeted  to  decline  from  3.6  percent  of  GDP in  2011  to  2.8  percent  of  GDP  in  2013)  to  help  ensure  public  debt  sustainability  and macroeconomic  stability.  This  consolidation  is  consistent  with  a  significant  increase  in social  expenditures,  financed  mainly  though  the  streamlining  of  capital  spending.  Exchange  rate  flexibility  to  facilitate  external  adjustment;;  Continued  transition  to  an  inflation-­targeting  regime  to  consolidate  the  gains  achieved  in terms  of  price  stability;;  and  Enhanced  monitoring  of  banking  sector  risks,  strengthened  regulatory  framework  of  the financial  system,  and  containment  of  noncore  funding,  to  increase  resilience  to  shocks. In  addition,  the  program  supports  the  government’s  ambitious  structural  agenda.  This agenda  aims  at  improving  the  business  environment  and  boosting  competitiveness,  and includes  reforms  to  support  trade,  strengthen  competition,  address  skill  mismatches,  and strengthen  business  and  property  rights. The  IMF’s  program  engagement  is  supported  by  the  provision  of  technical  assistance  to strengthen  pubic  financial  management  and  fiscal  transparency,  improve  revenue administration,  enhance  national  accounts  and  external  sector  statistics,  modernize  the payment  system,  and  further  strengthen  banking  supervision.

Challenges  Ahead
The  main  near-­term  policy  challenges  will  be  to  further  strengthen  investor  confidence  to foster  sustained  private  sector–led  growth,  contain  public  spending  in  the  run-­up  to  the  2013 presidential  election,  allow  exchange  rate  flexibility  to  facilitate  the  external  adjustment, and  manage  capital  inflows  to  prevent  a  build-­up  of  new  vulnerabilities.  The  main  challenge in  the  medium  term  is  to  transition  to  sustainable  and  inclusive  growth  while  maintaining
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IMF Program Note on Georgia

macroeconomic  stability  and  strengthening  the  economy’s  competitiveness.

www.imf.org/external/np/country/notes/georgia.htm

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