The FINANCIAL -- An International Monetary Fund (IMF) mission led by Mark Griffiths visited Tbilisi November 9-21, 2015 to conduct discussions on the second and third reviews under Georgia’s Stand-By Arrangement (SBA) with the IMF.
On December 8, Mr. Griffiths issued the following statement:
“Georgia’s economy continues to cope with the difficult external environment. The slowdown and currency depreciations in its main trading partners have lowered Georgia’s exports and remittances. The resulting shortfall in foreign earnings, combined with the worldwide strengthening of the U.S. dollar, has caused the Georgian Lari to depreciate by more than 35 percent against the U.S. dollar over the past year. This depreciation is helping the economy to adjust to external shocks, but it has also increased the debt burden of borrowers with dollar loans, weighing on domestic demand.
“Despite the severe shock, the economy appears to be stabilizing. Growth has been slightly higher than projected earlier and should reach 2.5 percent in 2015, before strengthening to 3 percent in 2016. This forecast is subject to downside risks, mainly from further deterioration in trading partner economies. While inflation has picked up, it should end the year only slightly above the National Bank of Georgia’s (NBG) inflation target of 5 percent.
“The external shock led to a widening of the current account deficit to a projected 11 percent of GDP this year. However, there are signs that Georgia’s foreign trade is improving: exports and remittances have bottomed out, while tourist inflows are growing again. Imports fell by 8 percent in the third quarter compared to the last year (16 percent excluding one-offs). The current account deficit should therefore improve to about 9 percent of GDP in 2016. With the external debt at around 100 percent of GDP, the current account deficit will need to fall further over the medium term.
“Despite the slowdown, total government revenue should increase this year because tax revenue has performed well and non-tax revenue and grants have been even higher than projected. These higher revenues should allow the government to keep the fiscal deficit at or only slightly above the 3 percent of GDP target in the original budget despite higher than projected spending on universal healthcare, subsidies, and the reconstruction works caused by the June floods.
“The 3 percent of GDP fiscal deficit proposed in the 2016 draft budget should support inclusive growth and improve external stability. In line with the government’s priorities to strengthen social protection and promote growth, the budget increases spending on universal healthcare and pensions. Health spending in 2015 has been much higher than budgeted. The government needs to monitor this spending closely in 2016, make sure that it introduces efficiency savings, and, if spending overruns persist, have contingency plans ready to keep the deficit to 3 percent of GDP.
“Fiscal risks from government guarantees—including those to backstop power-purchase agreements to encourage hydropower investment—should be managed carefully to safeguard Georgia’s hard-earned fiscal sustainability. It is important to put in place a framework in line with best international practice to monitor, assess, and fully disclose fiscal risks from such guarantees.
“The mission strongly supports the NBG’s policy to allow the Lari to float and to limit foreign exchange interventions only to dampen excess exchange rate volatility. Intervening to resist likely long-lasting external shocks would not succeed and would only waste foreign currency reserves. Depreciation has helped absorb the external shock by reducing imports, preserving the competitiveness of domestic producers, and protecting the value of remittances. Finally, achieving the NBG’s main objective of price stability requires a floating exchange rate. To continue fulfilling this objective and safeguarding financial stability, the NBG should have full operational independence.
“The authorities are awaiting the Constitutional Court ruling on the legislation that removes banking supervision from the NBG. It is important that banking supervision remains independent of political and industry interference and of high quality.
“The mission and the authorities have made substantial progress toward reaching a staff-level agreement on the second and third reviews. The mission will work to finalize with the authorities the letter of intent in the coming weeks, including agreeing on the strategy to keep banking supervision independent, on ensuring sufficient level of foreign reserves, improving the framework for managing and disclosing contingent liabilities, and on structural reforms to promote growth. If these final discussions are successful, the second and third reviews can be completed in early 2016.
“The mission would like to thank the President, the Prime Minister, other members of the government, and the NBG for open and constructive discussions.”