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Georgia and the IMF News Brief: IMF Completes Second Review of Georgia's PRGF Program |
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Georgia—Letter
of Intent,
Memorandum of Economic and Financial Policies, Technical Memorandum of
Understanding
Mr. Horst Köhler Dear Mr. Köhler: Georgia has made progress in implementing the comprehensive economic reform program supported under the PRGF arrangement. Macroeconomic stability has been maintained, despite a deterioration in the external environment. There have also been some important reforms in the fiscal area and in the financial sector, although much more remains to be done. In the attached Memorandum of Economic and Financial Policies, we set out our main macroeconomic objectives and structural reform initiatives for 2002, which are consistent with our medium-term policy objectives described in the draft Poverty Reduction Strategy Paper (PRSP). At the center of the program is the aim to increase fiscal revenue collection, in order to move towards levels of social spending and institutional reforms that could support long-term growth and poverty reduction. We will continue to improve expenditure management and strengthen banking supervision. We are also committed to accelerating reforms in the energy sector, further efforts in the fight against corruption, and improving the business environment. In support of this program, Georgia requests the completion of the second review under the PRGF arrangement, following the implementation of measures set out in Table 1 (Section A). For reasons discussed further below, we also request a change in the frequency and phasing of disbursements and waivers for non-observance of end-December 2001 performance criteria on tax revenue and expenditure arrears, the end-February 2002 performance criterion on the adoption of a budget system law, and the continuous performance criterion on external arrears. I am confident that the measures described below are adequate to achieve the broad objectives of the program. The government and the National Bank of Georgia (NBG) will take any other measures that may become appropriate for this purpose. The government will continue to consult regularly with the Fund concerning additional measures that may become appropriate and will provide the Fund with such information as the Fund requests in connection with the progress of Georgia in implementing the policies and reaching the objectives of the program supported under the PRGF arrangement. Georgia will conduct discussions with the Fund for the third review of its program under the PRGF arrangement before November 2002. Yours truly, /s/ Eduard Shevardnadze |
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Memorandum of Economic and Financial Policies for 2002 A. Introduction 1. This memorandum sets out the economic and financial policy objectives of the Georgian authorities for 2002 and beyond. The policies to achieve these objectives are the basis for the second review under the 3-year program supported under the PRGF arrangement that was approved by the Executive Board of the IMF on January 12, 2001. The first review under the program was completed on October 26, 2001. 2. Georgia has made progress in implementing the economic program supported under the PRGF. Notable achievements include higher GDP growth and lower inflation than originally envisaged, an increase in international reserves, no significant net accumulation of social expenditure arrears in 2001, financial sector and public expenditure management reforms, and an agreement with Paris Club creditors on debt rescheduling. 3. However, progress was slow in some key areas. There has not yet been a sustained improvement in tax revenue collections, due to slow reforms of the tax and customs administration and frequent tax code amendments that have narrowed the tax base. Regional and political instability in Georgia, as well as a poor investment climate, have undermined the prospect for foreign investment. Despite recent initiatives, corruption remains a very serious problem. The serious situation in the energy sector constitutes a significant risk to macroeconomic stability and growth. The weakness of the Turkish economy has reduced export opportunities. Poverty remains widespread and the low level of fiscal revenues has hindered progress in addressing this problem. 4. Removing these constraints will be critical for achieving long-term economic growth and poverty reduction, as set out in the draft PRSP. In 2002, we will therefore prioritize our program on the following objectives:
5. We discuss these objectives in more detail below. In addition, we have reached understandings with Fund staff on a set of macroeconomic targets and structural benchmarks (Tables 1 and 2), subject to the specifications set out in the attached Technical Memorandum of Understanding (TMU). B. Performance Under the Program 6. Real GDP growth was 4½ percent in 2001, reflecting a rebound in agriculture and strong growth in transport and retail trade. The industrial sector continued to shrink in 2001, partly due to energy supply problems early in the year. Inflation was 3½ percent at the end of 2001, below program projections. The exchange rate depreciated modestly, reflecting economic problems in Turkey and the dismissal of the Georgian government in late 2001. 7. Fiscal performance was uneven in 2001. Very low tax collections in the first quarter of 2001 and lower than expected external financing necessitated a revision to the program and a budget amendment in October 2001. Tax collections recovered from May onwards, although the end-December performance criterion was missed by a small margin. The performance criterion on arrears was also missed, although for the year as a whole the budget did not incur significant social expenditure arrears on a net basis, which was an important improvement over previous years. The fiscal deficit on a commitments basis fell from 4 percent of GDP in 2000 to 2 percent in 2001, and the end-December 2001 performance criterion on the cash deficit was observed. 8. Monetary policy in 2001 was in line with the revised program, and end-December monetary performance criteria were met. Reserve money growth exceeded program projections somewhat, reflecting a faster than expected accumulation of foreign exchange reserves by the NBG. Official reserves rose from US$109 million at the end of 2000, to US$161 million at the end of 2001, or 1½ months of imports of goods and services. Broad money grew by 18½ percent as the process of remonetization continued. 9. The balance of payments was negatively affected by weak demand from Turkey and the downturn in the world economy. The trade deficit widened in 2001, reflecting a decline in exports, and foreign direct investment was substantially lower than in the previous year. In March 2001, the Paris Club agreed to reschedule Georgia's bilateral debts falling due in 2001 and 2002 over 20 years, with a 3-year grace period and a graduated repayment schedule. All bilateral creditors except China, Turkmenistan and Uzbekistan have agreed to reschedule Georgia's debts on comparable terms. There was a delay in external interest payments to China from mid-2001 and to the USA in late 2001, constituting a breach of the continuous performance criterion on external arrears. These arrears have now been cleared. 10. Structural reform implementation was slower than expected in 2001. While good progress was made in improving fiscal expenditure management, there was virtually no improvement in the revenue-raising agencies. Smuggling, tax evasion, and corruption remain widespread. Two anti-corruption decrees were issued in 2001 and their implementation is being monitored by a specially appointed council. While the supervisory capacity of the NBG was strengthened in 2001, the banking system remains too small to make a major contribution to financing Georgia's investment needs. There has been very little progress in reforming the energy sector in the last two years and much remains to be done in the agricultural sector. C. Medium-Term Objectives 11. At the center of our medium-term economic program is a sustained increase in tax collections, with the tax-to-GDP ratio increasing by about ½ percentage point of GDP each year. This will require strengthening administration in the revenue-raising agencies, fighting corruption and smuggling, and policy reforms aimed at simplifying the tax system and broadening the tax base. The additional fiscal resources will be channeled primarily into the social sector, targeted at poverty reduction. 12. Current levels of public expenditure are too low to finance the social spending and strengthening of public institutions that are required to support long-term growth and poverty reduction. In addition to increased tax collections, assistance from donors and multilateral lenders will continue to be required to support structural reforms and investments in infrastructure, with a focus on health, education, agriculture, and the energy sector. We will also request additional debt rescheduling under the Paris Club, on concessional terms, to help finance projected balance of payments gaps and ensure medium-term debt sustainability. The limited capacity of the state to assume further debts will constrain the size of fiscal deficits over the medium term. 13. Improvements in governance and the investment climate will be necessary to achieve the target of at least 4 percent average GDP growth per year. Foreign direct investment and concessional project loans will be crucial to supplement limited domestic savings, in order to achieve the necessary scale and quality of investment. We will continue our policy of not assuming any new nonconcessional external debt. Monetary policy will continue to focus on maintaining low inflation and gradually building official reserves. This set of policies should ensure that the net present value of external debt falls to sustainable levels within the next 4-6 years. D. Macroeconomic Prospects for 2002 14. Growth prospects for 2002 are constrained by weaknesses in the world economy. The program is based on a cautious assumption of 3½ percent real GDP growth. Export growth is assumed to be modest, reflecting a subdued recovery in external demand. The recent downturn in foreign direct investment is expected persist throughout 2002. End-year inflation is targeted at 4-6 percent. 15. Macroeconomic performance during the first quarter of 2002 was in line with the program. GDP grew by an estimated 3¾ percent compared with the first quarter of the previous year. Inflation accelerated somewhat, to 7½ percent in the 12 months to May 2002, partly reflecting a modest exchange rate depreciation in late 2001 and early 2002. Fiscal and monetary performance in the first quarter of 2002 was broadly in line with the quantitative targets agreed with the Fund mission (Table 2), although a small planned repayment of old expenditure arrears was not fully made, partly due to a delay in grant financing. E. Fiscal Policy in 2002 16. The budget for 2002 is based on an increase in the tax-to-GDP ratio for the general government, from 14¼ percent in 2001 to 14¾ percent in 2002. In support of this goal, we are implementing a comprehensive set of tax and customs administration measures aimed at strengthening the revenue-raising agencies, discussed below. In addition, as a prior action for completion of the second review, we have implemented a number of tax policy measures, reducing exemptions under the VAT and profit tax, reversing recent cuts in land taxes and car fees, and replacing the VAT on bread with a fixed tax. 17. The deficit of the general government on a commitment basis is to be reduced from 2 percent of GDP in 2001 to about 1 percent in 2002. Social expenditures will be protected, in line with our poverty reduction strategy, including through the clearance of some pre-2001 social arrears amounting to ½ - ¾ percent of GDP. Overall, social spending on a cash basis is budgeted to increase from 8 percent of GDP in 2001 to 9 percent in 2002. The cash deficit is projected at about 1¾ percent of GDP. F. Monetary Policy in 2002 18. The monetary program for 2002 focuses on maintaining low inflation and strengthening the foreign reserve position of the NBG. It envisages net banking sector credit to the general government of about ¾ percent of GDP, reserve money growth of about 12½ percent and broad money growth of about 19 percent. Assuming a continuation of the recent trend in remonetization and decline in money velocity, this would be consistent with our inflation objective in the 4-6 percent range. Foreign exchange purchases by the NBG are projected at about US$23 million. There should be a modest improvement in net international reserves of the NBG and gross reserves should cover about 1¾ months of imports of goods and services by end-2002. If market conditions permit additional purchases, the NBG would be willing to exceed the monetary growth targets somewhat, as long as the inflation outlook remains broadly in line with the program. The NBG will maintain the floating exchange rate regime and refrain from foreign exchange sales aimed at supporting the lari. G. External Policies in 2002 19. Exports and foreign direct investment are expected to turn out weaker than assumed at the time of the first review under the PRGF arrangement. We therefore request that a projected financing gap of about US$12 million be closed through a rephasing of IMF disbursements. 20. We will continue to work with China, Turkmenistan and Uzbekistan to reach debt rescheduling agreements as soon as possible, on terms comparable with the Paris Club agreement. Since the agreement, Georgia has cleared US$12 million in arrears to Turkmenistan through non-cash operations, although Turkmenistan has not yet agreed to reschedule debt maturities on Paris Club terms. We will remain current on all scheduled interest to all creditors. 21. We will continue to maintain a liberal foreign trade regime, in line with our WTO commitments. Given the potentially serious consequences for the balance of payments, we have not renewed a temporary ban on timber exports that expired at the end of 2001 and, as a prior action for the completion of the second review, have recently reversed a temporary ban on the export of non-ferrous scrap metals. We will strongly resist any pressures to impose other restrictions on exports. H. Structural Reforms in 2002 Fiscal reforms 22. In order to strengthen the tax and customs administration, we have implemented a comprehensive set of measures in early 2002 and will take further steps this year. In particular, we:
a) have extended the coverage of the large taxpayers inspectorate to all large taxpayers, in line with IMF technical assistance recommendations, as a prior action for the completion of the second review; b) have made progress in establishing a valuation database and training customs officers for shipment inspections; c) have adopted new regulations on the registration of taxpayers and have initiated the revision of the taxpayers data base; d) have adopted tax code amendments that strengthen the enforcement of tax arrears collection, as specified in the attached TMU, as a prior action for the completion of the second review; e) are implementing measures to reduce smuggling of tobacco and petroleum products, by: g) will implement the Automated System for Customs Data (ASYCUDA) module to improve customs control of transit operations, by end-June 2002; h) will establish a treasury single revenue account at the NBG and adopt a new tax refund system, in line with IMF technical assistance recommendations, and will close all existing transit accounts by end-December 2002. 23. The budgetary process and expenditure control have been strengthened since the beginning of 2001, including through the closure of sub-treasury accounts at the ministries of defense and interior, an audit of expenditure arrears, the introduction of commitment recording for large purchases, and the application of standard expenditure control procedures to off-budget accounts outside the treasury. However, the adoption of a budget system law, originally a performance criterion for end-February 2002, has been delayed. During the remainder of this year, we will: a) prepare monthly expenditure plans for major spending categories, from April 2002 onwards; b) adopt, by end-October 2002, a budget systems law, prepared by the ministry of finance in consultation with IMF technical assistance, as specified in the attached TMU; c) establish full commitment control for all payments by the treasury for ministries and line agencies, by end-September 2002. Financial sector reforms 24. The NBG's supervisory capacity was strengthened significantly in 2001, including through the issuance of new asset classification rules for banks, the implementation of IAS accounting rules in the banking sector, and the establishment of the primacy of bank law in bank-related matters. We will accelerate the resolution of insolvent banks and tighten supervision of problem banks. Specifically, in order to strengthen banking supervision and enhance transparency in the financial sector, we: a) have adopted and published an analytical framework for the resolution of insolvent banks, in line with IMF technical assistance recommendations, and have introduced procedures for special supervision of banks that are identified as likely to have their licenses revoked; b) will adopt regulations to establish the "fit and proper" criteria for bank managers, as well as legislation and regulations to establish such criteria for bank owners, by end-September 2002; c) will adopt a law on money laundering, reflecting FSAP recommendations, by end-December 2002; d) will implement the measures summarized in Table 1 of the IMF Safeguard Assessment Report dated January 24, 2002, by end-December 2002. Energy sector reforms 25. The energy sector is affected by low collections, high debts, corruption, and a lack of investment. The government has been working with the World Bank and other organizations on reforms that would expand private sector participation in the sector. After the privatization of electricity distribution in Tbilisi and three power plants, it has been difficult to attract other investors. As an alternative, we have introduced a private management contract for the wholesale electricity market, as well as for transmission and dispatch. Combined with our efforts to restrict non-cash operations and to improve payments discipline by budgetary entities and state-owned companies, this approach should help raise total cash collections at the wholesale level from about 20 percent in 2001 to at least 50 percent in the second half 2002. At the same time we are planning to expand financial support to the most vulnerable parts of the population to ensure the affordability of basic utility services, including through increased allowances to refugees and clearance of social arrears, both provided for in the 2002 budget. We are also working to ensure the proper management and the eventual resolution of old energy debts, and to reduce theft and corruption. As part of the overall reform effort, we: a) have adopted a strategy for the resolution of old energy debts (as specified in the attached TMU) in consultation with the World Bank, as a prior action for the completion of the second review; b) have made legal and administrative changes to ensure that core physical assets are not transferred without an open privatization process; c) have merged regional distribution companies to prepare for a future management contract or privatization; d) will make operational a management contract for transmission and dispatch by end-July 2002, financed under the Electricity Market Support Project led by the World Bank; e) will raise cash collection rates from the general government and from direct customers of the wholesale electricity market (predominantly large state-owned enterprises) to at least 70 percent on average in the 6 months to end-September 2002; f) will develop and adopt legal amendments to strengthen enforcement provisions against electricity theft, in consultation with the World Bank, by end-December 2002. Poverty reduction strategy 26. Our poverty reduction strategy, set out in a draft PRSP, focuses on improvements in the business environment to stimulate long-term growth and on social sector reforms to provide adequate social spending and an equitable distribution of resources. Given the low fiscal revenue base, the scope for an increase in pro-poor spending is limited this year, but we have included in the 2002 budget a significant repayment of social arrears. The PRSP will lay out the medium-term path towards achieving a sustainable social safety net. In addition, we will continue to work with the World Bank and others to support the development of the private sector, including through land reform. We aim to complete a full PRSP, including priority measures and their impact on the medium-term budgetary framework, this year. Public sector reform and anti-corruption efforts 27. While the above reforms, especially in the fiscal area, should go some way toward strengthening governance, we will make additional efforts to combat corruption at all levels of government. The anti-corruption council will continue to monitor progress in implementing decrees No. 95 and No. 758. In addition, the government intends to develop a plan for a comprehensive restructuring of the public administration, aimed at improving the efficiency of government structures. Anti-corruption initiatives should support improvements in the business environment. Open and transparent government will be crucial for attracting urgently needed foreign direct investment. I. Program Monitoring 28. Table 1, Section A, lists the measures that have been implemented as prior actions for completion of the second review under the PRGF arrangement. Sections B and C list further structural measures we plan to take during the remainder of the year. Quantitative targets for 2002 are shown in Table 2. 29. We propose a change in the frequency of reviews and disbursements under the PRGF-supported arrangement, so that for the remainder of the program there would only be two disbursements per year, following the completion of reviews. In addition, given the projected balance of payments gap this year, described in paragraph 19 above, we request a re-phasing of IMF loans, raising total disbursements in 2002 to SDR 45 million, while keeping total access under the 3-year arrangement unchanged. The third review, scheduled to be completed by November 2002, will require meeting macroeconomic performance criteria shown in Table 2 at the end of September 2002 and structural performance criteria shown in Table 1 by end-October 2002. The third review will assess progress on structural benchmarks listed in Table 1, as well as on: a) addressing the problem of advance tax payments; b) the application of the new analytical framework and special supervision regime for resolving problem banks; c) the effectiveness of measures to raise overall energy sector collections at the wholesale level; d) recent anti-corruption initiatives. 30. Macroeconomic performance will continue to be measured by the same quantitative indicators (Table 2), subject to the attached TMU. Disbursements under the PRGF arrangement will continue to be subject to the continuous performance criteria specified in paragraph 53 of the Memorandum of Economic and Financial Policies attached to the letter dated December 6, 2000 (IMF Board document EBS/00/258).
June 27, 2002 1. This memorandum sets out the understandings between the Georgian authorities and the IMF staff regarding the definitions of quantitative and structural performance criteria and indicative targets for the arrangement supported under the Poverty Reduction and Growth Facility (PRGF) reported in Table 1 and 2 of the Memorandum of Economic and Financial Policies (MEFP), attached to the Letter dated June 27, 2002, as well as respective reporting requirements. It also provides definitions and reporting requirements for the continuous performance criteria described in paragraph 53 of the MEFP attached to the Letter dated December 6, 2000. 2. The quantitative performance criteria (ceilings and floors) and indicative targets listed in Table 2, Sections 1 and 2, of the MEFP are defined as cumulative changes from end-December 2001. Some floors and ceilings are adjusted by cumulative deviations of certain external financing flows from projections (Table 2, Section 3), converted at an accounting exchange rate of lari 2.15 per U.S. dollar.1 The program relies on adjusters that are symmetric and allow the substitution of net external non-project financing for net domestic credit to government (and net domestic assets of the NBG). However, any resulting increases in net domestic credit to government and net domestic assets of the NBG are subject to a cap. The program also allows for an automatic adjustment to the cash deficit target in case of deviations of external project financing from expectations, subject to a cap on upward adjustment. 3. While the adjustment mechanism is designed to accommodate unanticipated, temporary fluctuations in external financing, the caps imply that significant shortfalls in financing will require policy changes, including tighter fiscal policy, which would need to be considered in the context of a program review. Quantitative Performance Criteria, Indicative Targets, and Continuous Performance Criteria: Definitions and Reporting Standards A. Floor on Tax Revenues 4. Definition: Tax revenues are defined as total tax collections by the State Tax Department and the State Customs Department, including tax revenues from the central government, local governments, and extrabudgetary funds. The tax revenues are recorded when these are paid into the treasury's revenue account(s) in the National Bank of Georgia (NBG). The tax revenues exclude the amounts retained by the revenue agencies for bonus payments. 5. Adjustment clauses: Once a change is made in accounting practices so that the bonus payments to the revenue agencies are included in the treasury's revenue account(s), the revenue targets will be adjusted upward by the applicable bonus share. 6. Supporting material: The Ministry of Finance (treasury) will provide data showing a detailed breakdown of tax revenues paid into the NBG revenue accounts (form 412) on a monthly basis within two weeks of the end of each month. The local budget department in the Ministry of Finance will provide additional information on revenue collections of local governments. The authorities will also provide data on any offset transactions on a monthly basis. B. Indicative Target for Revenues from Cigarettes and Petroleum 7. Definition: This is defined as the total of customs duties, excise duties, and VAT collected by the State Tax Department and the State Customs Department on the domestic production and imports of cigarettes and petroleum products. 8. Adjustment clauses: None. 9. Supporting material: The Ministry of Finance will provide data with a break-down into the main categories of products on a monthly basis within two weeks of the end of each month. C. Ceiling on Expenditure Arrears 10. Definition: Expenditure arrears are defined as a subset of arrears incurred by the general government on the following expenditure items: wages and salaries; pensions; health programs and invalid NGO programs; family allowances; stipend and food compensations; refugee allowances; transfers to SMIC; and transfers to the employment fund. Once sufficient progress is made on introducing commitments recording in the treasury, the measurement of arrears will be strengthened by applying the following principles for recording expenditure arrears: (a) the goods and services have been received; (b) these have been certified to conform to the order of the contract; (c) the bill for payment has been received; and (d) the due-for-payment date has passed and the bill has remained unpaid beyond the normal or agreed period of credit. Until then, the net change in arrears will be estimated as the difference between actual cash spending and the monthly cash limits issued to spending units prior to the beginning of the month. 11. Adjustment clauses: None. 12. Supporting material: The Ministry of Finance (treasury) will provide monthly data, with a detailed break-down by economic and organizational category, on cash spending and commitments made by the central government, and/or cash limits issued to the spending units. The information on cash limits and spending commitments will be provided within two weeks from the beginning of each month. The information on cash spending will be provided within four weeks of the end of each month. The local budget department in the Ministry of Finance will provide information on monthly spending by the local budgets, and the extrabudgetary funds will provide information, through the Ministry of Finance, on their monthly expenditures. D. Ceiling on the Cash Deficit of the General Government 13. Definition: The cash deficit of the general government will be measured from "below-the-line," equal to the total financing (domestic and external, plus privatization proceeds) received by the general government.2 Privatization receipts consist of all gross proceeds received by the central and local governments. Domestic financing consists of all bank and non-bank financing to the general government. External financing is defined as the total of disbursements, macroeconomic support, net change in arrears, minus amortization. Disbursements include all project financing (capital expenditure and net lending) and balance of payments support (excluding grants) received by the budget. Amortization includes all external debt-related payments of principal; amortization to external creditors via third parties is accounted for at the time and in the amount of payment by the budget to the third party, rather than at the time of recognition of amortization by the external creditor. 14. Adjustment clauses: The ceiling will be adjusted to reflect cumulative deviations from program assumptions on external project financing for capital expenditure or net lending minus non-project grants plus external interest payments (see Table 2, Section 3). The ceiling at the end of a quarter will be adjusted upward (downward) by the full amount of the cumulative excess (shortfall) of external project financing minus non-project grants plus external interest payments. There will be a cap on cumulative upward adjustment of lari 80 million. 15. Supporting material: Data on privatization receipts will be provided by the Ministry of Finance (treasury) on a monthly basis within two weeks of the end of each month. The data will be consistent with the revenue account(s) in the NBG (form 412). Data on domestic financing (bank and non-bank) will be provided by the NBG. Until further improvements in the NBG accounts, the treasury will provide information on Ministry of Finance guaranteed loans (including guaranteed amount, principal repayment schedule, and actual principal and interest payments). Data on external project financing and non-project grants will be provided by the Ministry of Finance in a table on project and grant disbursements by creditor, on a monthly basis within two weeks of the end of each month. E. Ceiling on Net Credit of the Banking System to the General Government 16. Definition: Net credit of the banking system to the general government includes net credit to the general government from the NBG and the deposit money banks. General government is defined in this context as the central government, local government, and extrabudgetary funds. Credit to the government includes: all loans to the general government, all treasury bills issued by the general government (including those purchased by the central bank), as well as all government-guaranteed loans from the banking system to other entities. Net credit to the government is credit to the government less deposits of the general government in the banking system. In addition, any accrued government interest obligations to the NBG would be reflected in net credit to the government. Government bonds issued to cover NBG losses are excluded from net credit to the government. 17. Adjustment clauses: The ceiling on net credit of the banking system to the general government will be adjusted to reflect cumulative deviations from program assumptions on net external non-project flows to the budget (see Table 2, Section 3), which is defined as the sum of all foreign-currency denominated privatization receipts, disbursements under the World Bank's SAC program, and non-projects grants, minus external amortization and interest payments by the general government. Amortization and interest payments are recorded at the time and in the amount of actual debt-related payments made by the general government. The ceiling at the end of a quarter will be adjusted upward (downward) by the full amount of the cumulative shortfall (excess) of net external non-project flows, subject to a cap on cumulative upward adjustment of lari 25 million. 18. Supporting material: The NBG will provide the monetary survey on a monthly basis within two weeks of the end of each month. The NBG will also provide information on the activities of the treasury bill market. The necessary information on net external non-project flows will be provided in a table on the NBG's foreign exchange flows (which includes details on inflows, outflows, and net international reserves) on a monthly basis within a week of the end of each month. The Ministry of Finance will provide additional information on the repayment of principal and interest on government-guaranteed loans from commercial banks on a monthly basis. F. Ceiling on Net Domestic Assets of the NBG 19. Definition: Net domestic assets of the NBG are defined as the difference between net foreign assets and reserve money. Net domestic assets include net claims on government (including loans and treasury bills purchased by the NBG, accrued government interest obligations to the NBG, less deposits of the government with the NBG.), claims on banks, claims on the rest of the economy (including the KfW loan), and other items net (including the NBG capital accounts, net unclassified assets, counterpart funds and exchange rate revaluation). 20. Adjustment clauses: The ceiling on net domestic assets of the NBG will be adjusted to reflect cumulative deviations from program assumptions on net external non-project flows (see Table 2, Section 3), which is defined as the sum of all foreign-currency denominated privatization receipts, disbursements under the World Bank's SAC program, and non-project grants, minus external amortization and interest payments by the general government. Amortization and interest payments are recorded at the time and in the amount of actual debt-related payments made by the general government. The ceiling at the end of a quarter will be adjusted upward (downward) by the full amount of the cumulative shortfall (excess) of net external non-project flows, subject to a cap on cumulative upward adjustment of lari 25 million. 21. Supporting material: The NBG will provide data on its balance sheet, which includes data on its net domestic assets, on a monthly basis within one week of the end of each month. The necessary information on net external non-project flows will be provided in a table on the NBG's foreign exchange flows (which includes details on inflows, outflows, and net international reserves) on a monthly basis within one week of the end of each month. G. Floor on Net International Reserves of the National Bank of Georgia (NBG) 22. Definition: Net international reserves (NIR) of the NBG in U.S. dollars are calculated on the basis of assets and liabilities of the NBG, using program assumptions of bilateral exchange rates (2.15 lari per U.S. dollar, 1.28 U.S. dollar per SDR, and 0.90 U.S. dollar per euro). Gross reserves of the NBG are defined as liquid, convertible currency claims of the NBG on nonresidents that are readily available. Pledged or otherwise encumbered assets, including but not limited to assets used as collateral (or guarantee for third party external liabilities) are excluded from reserve assets. Reserve liabilities include the use of Fund resources and any other liabilities of the NBG. The stock of NIR in period t is calculated as the stock of NIR in period (t-1) plus the net inflow of foreign exchange in period t, the change in the value of gold stock at market prices in period t, and the change in the stock of liabilities to the IMF and other creditors in period t. 23. Adjustment clauses: The floor of net international reserves will be adjusted to reflect cumulative deviations from program assumptions on net foreign-currency non-project flows (see Table 2, Section 3), which is defined as the sum of all foreign-currency denominated privatization receipts, disbursements under the World Bank's SAC program, and non-projects grants, minus external amortization and interest payments made in foreign currency by the general government and NBG. Amortization and interest payments are recorded at the time and in the amount of actual debt-related payments made. For a shortfall (excess) of net foreign-currency non-project flows, the floor on NIR will be adjusted downward (upward) by the full amount, subject to a cap on cumulative downward adjustment of US$20 million. 24. Supporting material: Data on net international reserves and data on net foreign-currency non-project financing will be provided in a table on the NBG's foreign exchange flows (which includes details of inflows, outflows, and net international reserves) on a monthly basis within the week following the end of the month. H. Ceiling on Contracting or Guaranteeing New Non-Concessional Medium- and Long-Term External Debt by the Public Sector (with original maturity of 1 year or more) 25. Definition: The public sector consists of the central government, the National Bank of Georgia (NBG), and local authorities. Non-concessional external loans are defined as loans from lenders other than the IMF with a grant element of less than 35 percent of the value of the loan. The grant element is to be calculated by using currency-specific discount rates reported by the OECD (CIRRs).3 For maturities of less than 15 years, the grant element will be calculated based on six-month averages of commercial interest rates. For maturities longer than 15 years, the grant element will be calculated based on 10-year averages. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received.4 Previously contracted non-concessional external debt that has been rescheduled shall be excluded from the definition of "new debt" for the purposes of this performance criterion. 26. Adjustment clauses: None. 27. Supporting material: Details of all new commitments and government guarantees for external borrowing, with detailed explanations, will be provided by the Ministry of Finance on a monthly basis within two weeks of the end of each month. I. Ceiling on Contracting or Guaranteeing Short-Term External Debt by the Public Sector (with original maturity of less than 1 year) 28. Definition: The public sector consists of the central government, the National Bank of Georgia (NBG), and local authorities. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 12274-(00/85) August 24, 2000), see footnote for Section H, but also to commitments contracted or guaranteed for which value has not been received. 29. Adjustment clauses: None. 30. Supporting material: Details of all new commitments and government guarantees for external borrowing, with detailed explanations to be provided by the Ministry of Finance on a monthly basis within two weeks of the end of each month. J. Non-Accumulation of External Arrears 31. Definition: During the period of the arrangement, the general government and the NBG will not accumulate any new external payment arrears. Official arrears on external debt service obligations include any non-payment of interest and/or principal in full and on time falling due to all creditors, including the Fund, the World Bank, and other official creditors. 32. Adjustment clauses: None. 33. Supporting material: Details of official arrears accumulated on interest and principal payments to creditors will be reported within one week from the date of the missed payment. K. Non-Introduction of Exchange and Trade Restrictions 34. Definition: During the period of the arrangement the general government and the NBG will not impose or intensify restrictions on payments and transfers for current international transactions; will not introduce multiple currency practices; will not conclude bilateral payments agreements that are inconsistent with Article VIII; and will not impose or intensify import restrictions for balance of payments purposes. 35. Adjustment clauses: None. 36. Supporting material: The government and NBG will inform the Fund about any changes to the exchange and trade regime. L. Indicative Target for Reserve Money 37. Definition: Reserve money is defined as currency in circulation and required reserves of deposit money banks and balances on banks' correspondent accounts. 38. Adjustment clauses: None. Supporting material: The central bank balance sheet is to be transmitted on a monthly basis, within one week of the end of the month. M. Target for Cash Collection Rate from Direct Customers of the Wholesale Electricity Market 39. Definition: Cash collection rate is defined as the ratio of all cash payments received in a given time period to the lari billed amount in the same time period. Direct customers of the Wholesale Electricity Market are defined as all customers receiving electricity through the Wholesale Electricity Market excluding the electricity distribution companies. For comparability purposes, the data will separately include the delivered, billed and collected amounts from all transactions originated from direct contracts concluded after February 1, 2002 by any current or former member of the Wholesale Electricity Market. 40. Adjustment clauses: None. 41. Supporting material: The Ministry of Fuel and Energy will provide both aggregated data on electricity delivery, billing and collection amounts as well as a breakdown into payments by all individual customers of the Wholesale Electricity Market and individual transactions based on direct contracts described in the definition above. The total payments received from each customer of the WEM as well as payments originating from the direct contracts will be broken down into cash and offset payments. Subsidies paid in cash by donors to the WEM should be included in the cash component of payments. Monthly data will be reported, within [three weeks] of the end of each month. N. Target for Cash Collection Rate from the General Government 42. Definition: Cash collection rate is defined as the ratio of all cash payments received by electricity distribution companies in a given time period to the lari billed amount in the same time period. General government is defined as all organizations that are principally financed from the local or state budgets. 43. Adjustment clauses: None. 44. Supporting material: The Ministry of Fuel and Energy will provide data on electricity delivery, billing and total collection amounts and a breakdown into cash and offset payments by organizations financed by local and state budgets (separate data for local and central budgetary organizations). This data will be reported for each electricity distribution company and as an aggregate. Monthly data will be reported, within [three weeks] of the end of each month. O. Adoption of a strategy to resolve the debts of the energy sector 45. Definition: The strategy to resolve the debts of the energy sector should be set out in a strategy paper, to be adopted by the government. The strategy should address both internal and external debts of the energy sector (electricity and gas). The strategy - to be developed in consultation with the World Bank - should ensure that core physical assets cannot be swapped for debts without government approval and can be privatized only to qualified investors through an open and transparent privatization process. The strategy paper should (a) identify and quantify internal and external debts, with detailed information on creditors, debtors, loan terms, and guarantees, as well as any previous approaches to debt resolution, (b) suggest a resolution mechanism for each type of debt, with detailed information on financing sources, (c) provide a timetable for action by each responsible agency, (d) provide a projection of debt levels and required payments for each type of debt, (e) provide an analysis of the fiscal impact of the proposed strategy. P. Extending the Coverage of the Large Taxpayer Inspectorate to all Large Taxpayers 46. Definition: A large taxpayer is any taxpayers, legal or physical person, whose annual turnover or annual gross income is above lari 2,500,000 or whose tax liabilities, accrued over one fiscal year, are above lari 200,000 lari. The registration of any taxpayer fulfilling the above mentioned criteria is to be mandatory and provided by the law. Q. Extending the Status of Customs Zones to International Airports, Seaports, Railways, and Pipelines 47. Definition: To give airports, seaports, railways and pipelines the status of customs zones means that customs officers will have access to, and control of, appropriate parts of these sites. The customs zone at the international airport includes the tarmac, the "airside" passenger areas, the temporary stores and warehouses for uncleared import and export cargo, and the duty-free shop. With respect to the railway system and pipelines, only those necessary for adequate customs control of uncleared goods (including those in through-transit, that is the access points) should be considered customs zones. R. Adoption of Stronger Enforcement Provisions in the Tax Code 48. Definition: Adoption of a law on tax lien, establishing the government's interest in the whole property of every tax debtor and allowing the government to administratively liquidate its interest in the property of tax debtors; adoption of a law enabling administrative collection of tax liabilities by employees of a government's tax department; implementation of a case prioritizing system to address administrative collection of tax liabilities; creation of a reporting system to measure results of administrative collection of tax liabilities and suggest areas of improvement; organization of training courses for tax liability collectors and liability collection managers. S. Adoption of a Budget System Law 49. Definition: A budget system law that provides a sound legal framework for budget preparation, presentation and approval; budget execution; government borrowing and debt; and budget accounting, inspection, and auditing; should include the following: (a) a comprehensive coverage of the budget (coverage has to include: all the levels of government; all stages of the budget process, from budget preparation to budget execution and reporting; and all inflows and outflows of resources); (b) the establishment of a consolidated fund into which all inflows of resources shall flow and from which all outflow take place following due process of law; (c) a medium-term macroeconomic framework and a medium-term fiscal framework, which covers at least one year following the budget year. (d) a budget circular that indicates a hard budget ceiling both for the aggregate budget (overall spending envelope) and a resource envelope for the line ministries; (e) the submission by the government to parliament of a quarterly review on the status of budget execution; (f) publishing the draft budget; (g) a revision of the budget following the approval of any normative act affecting the receipts or payments approved in the annual budget. The revision of the budget has to be approved by the time of the next quarterly budget review. T. Reorganization of NBG Functions to Strengthen Internal Controls 50. Definition: This includes the restructuring of foreign exchange operations to provide for clear and effective separation of control over front office, back office, and risk management activities, including the establishment of an independent middle office, as elaborated in Chapter VII of the IMF's Safeguards Assessment Report dated January 24, 2002. It also includes the establishment of an NBG-wide accounting function under a single point of control and responsibility that oversees all of the bank's accounting processes, and developing a financial controller role within the bank, as elaborated in Chapter VII of the IMF's Safeguards Assessment Report dated January 24, 2002. 1For instance, if a disbursement of $10 million originally projected to accrue in the first quarter is delayed until the second quarter of 2002, then an adjuster of $10 million (lari 21.5 million) would apply to end-March targets, but not to end-June, when net external financing would have returned-on a cumulative basis-to the originally projected level. In practice, this means that a delay in external financing inflows can be compensated temporarily by higher domestic credit, but not permanently, implying a repayment to the NBG once the delayed disbursement accrues. 2Modest differences between the recorded financing and the cash deficit, calculated as expenditures plus net lending minus revenues and grants, can be attributed to check-float and smaller errors and omissions. 3An electronic spreadsheet file that shows the relevant discount rates reported by the OECD (CIRRs) will be provided on a periodic basis by Fund staff. 4The definition of debt set forth in No. 9 of the guidelines reads as follows: "(a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lessor retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt." |
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