Public Information Notice No. 04/4

Public Information Notice: IMF Reviews Georgia's Performance Under Past Fund-Supported Programs

January 30, 2004

On January 21, 2004, the Executive Board of the International Monetary Fund (IMF) reviewed Georgia's experience with two Fund-supported programs since 1996, under the new guidelines on assessments of countries with a longer-term program engagement.¹

Background

Georgia has faced daunting challenges since independence, in an environment rife with political tension, declining living standards, and severe economic dislocations. Dwindling tax revenues in the first years of independence have reduced the government's ability to fund basic state functions, while the de facto secession of two provinces has undermined its control over the country's territory. In the face of these obstacles, Georgia has had to build basic national institutions and embark on fiscal consolidation and first-generation reforms, including privatization, land reform, and energy sector rehabilitation. While progress has been made in the context of the last two Fund-supported programs, the results fell short of expectations during the recent Poverty Reduction and Growth Facility arrangement, which expired on January 11, 2004.

Executive Board Assessment

Executive Directors welcomed the opportunity to review—under the guidelines on assessments of countries with longer-term program engagement—Georgia's experience with two Fund-supported programs since 1996. Directors commended Georgia for the pursuit of sound macroeconomic policies and the progress made with some structural reforms over the past eight years. As a result, Georgia has made notable advances toward macroeconomic stabilization, liberalization of the trade and payments system, and implementation of substantial financial sector reforms.

Directors observed, however, that important program goals, including the strengthening of the public finances and sustained implementation of structural reforms, remain unrealized. They agreed that the weaknesses in program implementation and institutional capacity that had characterized both Fund-supported programs stemmed in large part from ongoing governance problems and pervasive corruption, the influence of vested interests, as well as limited program ownership by the authorities. Today Georgia remains a very poor country with significant macroeconomic vulnerabilities, as well as a large, unfinished agenda for transition to a market economy.

Directors welcomed the work done by the staff to pinpoint key policy challenges facing Georgia and draw lessons learned on program design, based on its review of the country's past performance under Fund-supported programs. They agreed that in order to sustain economic growth, encourage private sector development, and reduce poverty, the highest priority should be to tackle the root causes of poor governance and pervasive corruption, and to build institutions well equipped to undertake these tasks. At the same time, the authorities will need to address the key macroeconomic challenge of pushing ahead with fiscal consolidation-paying particular attention to strengthening revenue performance and improving public expenditure policy and management. Also critical will be determined implementation of the structural reform agenda, particularly with respect to the energy sector, civil service reform, state property management, and further trade liberalization. Actions to normalize relations with creditors and improve the business climate will also be important. In looking at lessons learned from the program experience in Georgia, some Directors felt that such an assessment could benefit also from broader treatment of program design and conditionality issues. Directors welcomed the fact that the new administration in Georgia had reviewed the staff's assessment and shared its conclusions.

Directors discussed possible modalities of future Fund engagement with Georgia. A few Directors, recalling the uneven policy implementation in recent years and the still weak institutional capacity, called for special attention to be paid to the challenge of establishing a firm track record of policy implementation in combination with strong and broad-based ownership. These Directors suggested that a staff monitored program could provide an appropriate framework for assessing policy implementation going forward. Most Directors, however, encouraged the staff to engage the new authorities in response to their request for a successor PRGF arrangement. Based on staff's findings, the Board will come back to consider a possible arrangement if it is founded on realistic, but sufficiently robust and credible, policy commitments designed to tackle the enormous challenges still facing the country. These commitments should include fiscal consolidation, bold measures to tackle corruption and governance weaknesses, and progress on the structural reform agenda. A few Directors suggested that prior actions in some of these areas should be considered.

Directors encouraged staff to work closely with the new administration, and in collaboration with the World Bank staff, to develop a program, taking into account the lessons learned on conditionality and program design from today's discussion and the earlier arrangements. They acknowledged that renewed Fund involvement would capitalize on the window of opportunity presented by political change in the country to underpin more rapid economic growth and poverty reduction, by providing much-needed support and by helping to mobilize foreign assistance.