Press Release No. 17/130

IMF Executive Board Approves US$285.3 million Extended Arrangement Under the Extended Fund Facility for Georgia

April 12, 2017

• The approval allows for an immediate disbursement of SDR30 million (or about US$40.7 million)
• The program will help Georgia’s ambitious structural reforms to generate higher and more inclusive growth, focusing on: improving education; investing in road infrastructure; making the public administration more efficient.
• Fiscal consolidation over the medium term aims to anchor public debt to the current level and shifting spending toward capital investment to address infrastructure bottlenecks.

On April 12, 2017, the Executive Board of the International Monetary Fund (IMF) approved a three-year extended arrangement under the Extended Fund Facility (EFF) for Georgia for an amount of SDR 210.4 million (about $285.3 million or 100 percent of quota) to support the authorities’ economic reform program.

The EFF-supported program will help Georgia reduce economic vulnerabilities, pursue well-coordinated policies, and promote economic growth. The program includes ambitious structural reforms to generate higher and more inclusive growth, focusing on: improving education; investing in infrastructure; making the public administration more efficient; and improving further the business environment to boost the private sector as a growth engine.

The Executive Board’s approval allows for an immediate disbursement of SDR30 million (or about US$40.7 million). The remaining amount will be phased over the duration of the program, subject to six semi-annual reviews.

Following the Executive Board discussion, Mr Tao Zhang, Deputy Managing Director and Acting Chair, said:

“The Georgian authorities have adopted an economic program aimed at promoting growth while maintaining macroeconomic stability. Georgia faces several economic challenges, including a narrow production base, external and fiscal imbalances, and subdued economic growth with high unemployment. This situation has been exacerbated by low growth in major trading partners largely resulting from lower oil prices. The authorities’ program supported by the Extended Fund Facility will help address these challenges by reducing fiscal deficits while shifting public spending toward investment, accelerating structural reforms, strengthening the monetary policy framework, and enhancing financial sector supervision, safety nets, and bank resolution frameworks.

“The central bank will continue to strengthen its ability to meet inflation targets. While the financial sector has shown resilience to depreciation, the central bank is introducing macroprudential instruments to address currency mismatches, concentration risks, and systemically important banks. The authorities have also announced a comprehensive set of de-dollarization measures. The introduction of deposit insurance will help strengthen the financial safety net.

“Fiscal policy will aim to reduce the deficit gradually through measures to raise revenue and cut current expenditures, while spending on infrastructure investment will rise, supporting growth. Efforts will be made to increase efficiency in public healthcare while maintaining adequate healthcare coverage, especially for the most vulnerable. Control and disclosure of fiscal risks are being strengthened.

“Structural reforms are critical for the success of the program, enabling higher inclusive growth and economic diversification. The reform effort will focus on capital market development, pension reform, a PPP framework, public financial management, private sector governance and competition, and education reform.

“Risks to program implementation are significant, but should be mitigated by the authorities’ determined commitment to the policy package and the broad political support for the program.”

ANNEX

Recent Economic Developments and Outlook

As in other countries in the region, growth in Georgia remained subdued in 2016, reaching 2.7 percent, due to a decline in trading partners’ growth since late 2014. Inflation was also low, despite cuts in the policy rate, staying well below the 5 percent inflation target. The current account deficit widened slightly to 12.4 percent of GDP due to a worsening of the trade balance, and it continued to be financed by FDI. External debt, mostly concessional, grew close to 110 percent of GDP, in part due to currency depreciation.

The fiscal deficit reached 4.1 percent of GDP in 2016, higher than the originally budgeted deficit of 3.0 percent of GDP. Current spending overruns and higher budget lending were only partially offset by higher-than-envisaged excise and corporate profit tax revenues.

The exchange rate was volatile in 2016, prompting the National Bank of Georgia (NBG) to both sell and purchase foreign reserves to avoid excessive exchange rate volatility. Georgia’s banking sector, while highly dollarized, has remained resilient, with a minor increase in non-performing loans. The sector continued to report adequate capital, liquidity and profitability in 2016. Credit grew 12 percent (at constant exchange rate).

Real GDP growth is projected at 3.5 percent in 2017, and inflation is projected to remain above the NBG’s target (4 percent) in 2017 due to the lagged effects of exchange rate depreciation, higher commodity prices, and the excise tax increases, until it converges to the NBG target by 2018. Georgia’s economic outlook is subject to risks from the uncertain regional and global economic outlook.

Program Summary

Following parliamentary elections in October 2016, Georgia’s government has united around a program aimed at promoting higher and more inclusive growth while maintaining macroeconomic stability.

The authorities’ reform program, supported by the EFF, aims to strengthen financial stability, reduce external imbalances, enhance fiscal credibility, increase infrastructure investment, and undertake structural reforms. In particular, the program envisages:

• Fiscal consolidation over the medium term anchored on limiting debt to the current level, while shifting spending from current toward capital investment to address infrastructure bottlenecks.
• Structural reforms aimed at promoting savings, private sector investment, and improved competitiveness .
• Unlocking bilateral and multilateral support to help finance infrastructure investment and build foreign exchange reserves over the program period.

Program policies

Fiscal Consolidation while Creating Space for Investment: The authorities’ program aims to reduce current spending as well as increase revenues to create space for public investment. The cuts include better management of the wage bill, efficiency gains in current spending, and new spending controls on local governments. Efforts to increase efficiency in public healthcare are designed not to undermine adequate healthcare coverage, especially for the most vulnerable. On the revenue side, the government has increased taxes to offset revenue losses from the corporate income tax reform and partly finance additional capital spending. The authorities are committed to take additional measures, if needed, to meet the fiscal target.

Enhancing the Inflation Targeting Framework and Continued Exchange Rate Flexibility: The NBG remains committed to price stability, and to exchange rate flexibility. Inflation will be monitored regularly, with a view to ensuring consistency with the NBG’s medium-term inflation targets. The NBG will continue allowing the exchange rate to adjust with market conditions. The program will also aim to build up international reserves. The NBG will continue improving liquidity management and strengthening monetary policy, including by improving its communication.

Strengthening the financial sector : The authorities have reaffirmed the independence of the NBG in conducting its financial stability mandate. In line with the IMF’s Financial Sector Assessment Program (FSAP) recommendations, the NBG will introduce limits on loan-to-value and payment-to-income ratios for mortgages, with more stringent limits on loans denominated in foreign currency. The program will also, in the near term, strengthen safety nets and the resolution framework, and, in the medium term, enhance the lender of last resort framework.

Structural reforms: Structural reforms will promote job creation, economic diversification, and more inclusive growth. Capital market development, together with pension reform, will mobilize domestic savings and support private sector investment. Education reform will increase productivity and adapt skills to labor market demands. Enhancing governance and competition will help advance the economy toward emerging market status.