IMF Executive Board Concludes 2018 Article IV Consultation with Georgia
June 28, 2018
On June 27, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1] with Georgia.
Since the global financial crisis, macroeconomic performance in Georgia has been positive. Growth was higher than that in most peers, policy frameworks have been strengthened with inflation well-anchored and fiscal deficits broadly well-managed, the banking sector has remained stable—despite a large exchange rate depreciation—and foreign reserves have increased. After two years of sluggish growth, following the 2014 regional slowdown, growth has picked up and the external position strengthened. Supported by external demand and buoyant consumption, real GDP grew 5 percent in 2107. Annual inflation reached 6.7 percent at the end of 2017, and fell to 2.5 percent in April 2018 as the impact of one-off shocks (increase in excises) dissipated. Supported by revenue measures, the strengthened recovery, and the reduction in current spending, the fiscal position in 2017 remained stable while allowing a considerable ramp up in public investment. Rapid growth in exports, tourism, and remittances narrowed the current account deficit to 8.7 percent of GDP. FDI reached 10.5 percent of GDP in 2017. External debt, mostly concessional, remains elevated, at 96 percent of GDP in 2017, excluding intercompany loans.
The near-term outlook has improved moderately and the output gap is expected to close gradually in 2019–20. Over the medium to long term growth is expected to accelerate moderately and external vulnerabilities to decrease, thanks to the dividends from structural reforms. Risks to the outlook are balanced. Upside risks arise from stronger domestic and external demand, which, in the presence of structural bottlenecks, could result in demand pressures and require policy tightening. A larger-than-anticipated impact from structural reforms could also increase growth in the outer years. However, Georgia remains vulnerable to regional
developments and market volatility in main trading partners. Weaker growth in key advanced economies and a retreat from cross-border integration could undermine efforts to diversify exports.
The favorable macroeconomic environment offers Georgia an opportunity to advance reforms to increase resilience to external shocks and to promote higher and more inclusive growth, while preserving macroeconomic stability. The authorities are committed to fiscal sustainability, which—in the context of limited room to raise extra revenue—will be achieved by containing current spending while creating room for higher public investments. In the medium run, the need to ramp up spending to implement the education reform will be compensated by lower capital spending. To limit fiscal risks, the authorities have taken decisive steps to extend the coverage and the reporting of fiscal risk and to address issues with the VAT refund system. The authorities will continue to improve the monetary and financial frameworks by strengthening the crisis management system, supporting the development of capital markets, and actively providing incentives to de- dollarize. The authorities are committed to ambitious structural reforms to promote private sector-led activity through improvement of business environment, economic diversification, and job creation.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended Georgia’s strong economic performance under the EFF program supported by favorable external conditions and prudent economic policies, which has enhanced confidence and improved growth. Directors noted that while the macroeconomic outlook is generally positive and risks are balanced, Georgia remains vulnerable to external shocks, including market volatility in major trading partners. They noted that continued commitment to sound policies and further progress in structural reforms will be necessary to preserve the gains made, address remaining vulnerabilities, and foster stronger and more inclusive growth.
Directors welcomed the authorities’ commitment to prudent fiscal policies to preserve fiscal sustainability and strengthen fiscal credibility. They supported continued efforts to rein in current spending and improve revenue administration to create space for higher public investment, refund VAT credits, and narrow the fiscal deficit. Directors welcomed the progress made in the coverage and reporting of fiscal risks, which remain high, and arise mainly from state-owned enterprises and power purchase agreements. They encouraged further efforts to improve transparency and strengthen mechanisms to better monitor and control these risks. Directors also supported measures to revamp the fiscal rule framework to improve fiscal governance and accountability.
Directors considered that monetary policy is appropriately focused on price stability, supported by exchange rate flexibility and interventions that help smooth excessive volatility and build reserves. They supported strengthening the inflation targeting framework through efforts to improve liquidity management and communication. Directors commended the central bank for strengthening the financial supervision and regulatory framework, including by implementing FSAP recommendations. Given concerns about indebtedness, they supported efforts to contain credit to households by tightening prudential financial policies. Directors welcomed the gradual de-dollarization of the economy as a sign of increased credibility in monetary policy and progress in anchoring inflation expectations. They noted the need to bring the crisis management framework in line with best international practices, and stressed the importance of improving crisis management procedures, including implementing the emergency liquidity assistance and banking resolution frameworks.
Directors encouraged the authorities to take advantage of the current economic rebound to undertake reforms that will increase Georgia’s economic resilience to external shocks and promote higher, more inclusive, and private sector-led growth. In this context, they emphasized the need to prioritize growth-enhancing measures, particularly to improve infrastructure, education, labor market policies, and competitiveness. Directors welcomed Georgia’s efforts to improve the business environment and diversify export markets, including through free trade agreements. They noted that mobilizing foreign direct investment in export-oriented sectors is instrumental for enhancing competitiveness and supporting growth.
It is expected that the next Article IV consultation with Georgia will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
|
Georgia: Selected Economic and Financial Indicators, 2015 – 19 |
||||||||||
|
|
2015 |
2016 |
|
2017 |
|
2017 |
|
2018 |
2018 |
2019 |
|
|
Actual |
|
CR 17/3611/ |
|
Prel. |
|
CR 17/3611/ |
Projections |
||
|
National accounts and prices |
(annual percentage change; unless otherwise indicated) |
|||||||||
|
Real GDP |
2.9 |
2.8 |
4.3 |
5.0 |
4.2 |
4.8 |
4.8 |
|||
|
Nominal GDP (in billion of laris) |
31.8 |
34.0 |
37.3 |
38.0 |
40.1 |
41.4 |
44.8 |
|||
|
Nominal GDP (in billion of U.S. dollars) |
14.0 |
14.4 |
15.0 |
15.2 |
16.3 |
16.9 |
18.3 |
|||
|
GDP per capita (in thousand of U.S. dollars) |
3.8 |
3.9 |
4.1 |
4.1 |
4.4 |
4.5 |
4.9 |
|||
|
GDP deflator, period average |
5.9 |
4.2 |
5.4 |
6.5 |
3.4 |
3.8 |
3.3 |
|||
|
CPI, Period average |
4.0 |
2.1 |
5.8 |
6.0 |
2.8 |
2.8 |
2.9 |
|||
|
CPI, End-of-period |
4.9 |
1.8 |
5.6 |
6.7 |
3.2 |
2.7 |
3.0 |
|||
|
Investment and saving |
(in percent of GDP) |
|||||||||
|
Gross national saving |
19.5 |
19.9 |
20.6 |
23.2 |
22.5 |
25.5 |
26.0 |
|||
|
Investment |
31.5 |
32.7 |
31.0 |
31.9 |
33.1 |
34.7 |
35.2 |
|||
|
Public |
5.6 |
5.0 |
5.8 |
6.1 |
6.5 |
6.8 |
7.4 |
|||
|
Private |
25.9 |
27.7 |
25.2 |
25.8 |
26.6 |
27.9 |
27.7 |
|||
|
Consolidated government operations |
(in percent of GDP) |
|||||||||
|
Revenue and grants |
28.1 |
28.3 |
28.9 |
29.0 |
28.6 |
27.9 |
27.3 |
|||
|
o.w. Tax revenue |
25.1 |
25.7 |
25.9 |
26.0 |
25.6 |
25.0 |
24.7 |
|||
|
Expenditures |
32.0 |
32.5 |
33.0 |
32.7 |
32.0 |
31.1 |
31.0 |
|||
|
Current expenditures |
25.0 |
26.0 |
24.7 |
24.2 |
24.0 |
23.1 |
22.5 |
|||
|
Capital spending and budget lending |
7.0 |
6.5 |
8.3 |
8.5 |
8.1 |
7.9 |
8.5 |
|||
|
Net Lending/Borrowing (GFSM 2001) |
-1.3 |
-1.6 |
-1.1 |
-0.5 |
-1.5 |
-1.6 |
-1.5 |
|||
|
Augmented Net lending / borrowing (Program definition) 2/ |
-2.7 |
-3.0 |
-3.6 |
-2.9 |
-3.0 |
-2.8 |
-2.6 |
|||
|
Public debt |
41.4 |
44.4 |
42.3 |
44.9 |
42.7 |
42.8 |
43.5 |
|||
|
o.w. NBG debt to the IMF |
… |
… |
0.5 |
0.6 |
1.0 |
0.5 |
1.0 |
|||
|
o.w. Foreign-currency denominated |
32.5 |
35.1 |
33.1 |
35.6 |
34.0 |
33.2 |
33.1 |
|||
|
Money and credit |
(in percent; unless otherwise indicated) |
|||||||||
|
Credit to the private sector (annual percentage change) |
22.1 |
19.6 |
10.1 |
17.6 |
14.3 |
14.1 |
10.6 |
|||
|
In constant exchange rate |
4.3 |
12.0 |
15.5 |
20.1 |
14.3 |
18.0 |
10.7 |
|||
|
Broad money (annual percentage change) |
19.2 |
20.4 |
9.8 |
14.8 |
15.0 |
12.6 |
11.0 |
|||
|
Broad money (incl. fx deposits, annual percentage change) |
23.4 |
19.1 |
7.9 |
13.7 |
13.4 |
10.5 |
10.0 |
|||
|
In constant exchange rate |
5.1 |
13.3 |
14.7 |
16.9 |
15.0 |
16.2 |
11.1 |
|||
|
Deposit dollarization (in percent of total) |
66.8 |
69.9 |
64.8 |
63.7 |
64.1 |
59.7 |
57.5 |
|||
|
Credit dollarization (in percent of total) |
63.1 |
64.6 |
54.7 |
56.1 |
54.1 |
50.7 |
48.3 |
|||
|
Credit to GDP |
49.2 |
54.9 |
55.3 |
57.8 |
58.5 |
60.6 |
61.9 |
|||
|
External sector |
(in percent of GDP; unless otherwise indicated) |
|||||||||
|
Current account balance |
-12.0 |
-12.8 |
-10.4 |
-8.7 |
-10.6 |
-9.2 |
-9.2 |
|||
|
Trade balance |
-28.1 |
-26.9 |
-25.8 |
-25.3 |
-26.4 |
-27.2 |
-27.1 |
|||
|
Terms of trade (ratio) |
100.0 |
98.9 |
99.1 |
96.1 |
99.3 |
94.3 |
94.5 |
|||
|
Gross international reserves (in billions of US$) |
2.5 |
2.8 |
3.2 |
3.0 |
3.4 |
3.3 |
3.6 |
|||
|
In percent of IMF Composite measure (floating) |
89.9 |
90.9 |
93.3 |
90.1 |
95.2 |
93.3 |
98.8 |
|||
|
Gross external debt |
107.6 |
109.3 |
106.9 |
112.8 |
106.4 |
107.9 |
107.9 |
|||
|
Gross external debt, excl. intercompany loans |
86.1 |
91.8 |
87.4 |
95.6 |
86.5 |
90.9 |
90.6 |
|||
|
Laris per U.S. dollar (period average) |
2.27 |
2.37 |
2.5 |
2.51 |
… |
… |
… |
|||
|
Laris per euro (period average) |
2.52 |
2.62 |
2.8 |
2.83 |
… |
… |
… |
|||
|
REER (period average; CPI based, 2010=100) |
104.0 |
107.5 |
… |
… |
… |
… |
… |
|||
|
Sources: Georgian authorities; and Fund staff estimates. |
||||||||||
|
1/ Please refer to this link for details http://www.imf.org/en/Publications/CR/Issues/2017/12/07/Georgia-First-Review-under-the-Extended-Fund-Facility-and-Request-for-Modification-of-45448 . |
||||||||||
|
2/ Augmented Net lending / borrowing (Program definition) = Net lending / borrowing - Budget lending. |
||||||||||
[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .
IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Randa Elnagar
Phone: +1 202 623-7100Email: MEDIA@IMF.org