Press Release No. 09/456

Press Release: IMF Executive Board Completes Fourth Review Under the Stand-by Arrangement for Georgia and Modifies Performance Criterion

December 11, 2009

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Georgia's performance under an 18-month Stand-By Arrangement (SBA) for an amount equivalent to SDR 477.1 million (about US$ 759.3 million) approved on September 15, 2008 (see Press Release No. 08/208). On August 6, 2009, the Executive Board approved an augmentation of access under the SBA to an amount equivalent to SDR 747.1 million (about US$1,189 million) and an extension of the SBA until June 14, 2011 (see Press Release No. 09/277). The completion of the fourth review allows for the immediate purchase of an amount equivalent to SDR 47.3 million (about US$ 75.3 million).

The Executive Board also modified the end-December 2009 performance criterion on the ceiling for net domestic assets to reflect higher reserve money growth and introduced two new structural benchmarks: the government approval of a new medium-term expenditure framework by July 31, 2010 and government approval of a methodology to introduce a programmatic approach to budgeting by September 30, 2010. The new structural benchmarks are aiming at strengthening the efficiency of the adjustment strategy by improving linkages between the medium-term expenditure framework and annual budgets, and building the capacity for program budgeting.

After the Executive Board's discussion, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

“The Georgian economy shows tentative signs of recovery, but the external environment remains weak in terms of export market growth, and uncertain in terms of the recovery of private capital inflows. Furthermore, domestic credit conditions are still very tight, although interest rates have started coming down. For these reasons, risks remain elevated.

“The authorities’ economic strategy has succeeded in stabilizing financial conditions and market confidence, as witnessed in the steady reflow of deposits into commercial banks, the stabilization of the foreign exchange market, and the narrowing of Eurobond spreads. The large fiscal stimulus associated with the widening of the fiscal deficit was instrumental in averting a deeper economic contraction.

“The sizeable fiscal adjustment targeted by the authorities for 2010 is intended to place public finances on a path toward a sustainable position over the medium term, thereby strengthening confidence as the economy emerges out of the recession. The adjustment strategy is supported by structural reforms to enhance the efficiency of government spending and to improve an already very strong business environment. These policies will place Georgia in a good position to take advantage of a global recovery and to restore its access to capital markets ahead of the large external debt repayment obligations coming due in 2013.

“Foreign exchange market pressures have all but abated since May 2009, and intervention in support of the lari has been very limited. The stabilization of the foreign exchange market, reflects improved confidence and the contraction of imports due to the recession. Even though the external current account deficit has narrowed markedly, it remains structurally high. In this regard, the exchange rate will remain an important instrument of adjustment over the medium term.

“Credit conditions, as reflected by the level of real interest rates, remain tight, mostly as a result of the liquidity squeeze experienced by the banking sector in the wake of the war and during the subsequent domestic political uncertainty. Presently, banks have returned to comfortable liquidity conditions and interest rates have begun to decline. As traditional monetary policy tools regain traction and the economy recovers, monetary policy will be geared to preserving the gains made in terms of disinflation.

“The banking sector has weathered the crisis relatively well, and systemic risks have abated considerably since the beginning of 2009. Banks have retained a solid capital base, reconstituted strong liquidity buffers, and set aside adequate provisions. Risks, particularly related to indirect foreign currency exposures, remain pervasive, but the authorities have responded by upgrading their monitoring and response capacity, including through stress testing and the gradual adoption of more flexible regulatory and supervisory approaches. “