IMF Recommendations May Topple the Government

Heads to Start Falling, as Budgetary Shortcuts Endanger Powerful Interests

Recommendations of the International Monetary Fund (IMF) mission that visited Georgia on June 24-July 7 left the Georgian government with a dilemma. They should either take extremely unpopular decisions on the eve of elections, or risk losing support of the IMF, which brings a stream of funding into cash-stripped budget. With no way out in sight, at least some ministers may be forced to leave.

The IMF mission recommends Georgian government to quickly take a number of corrective actions to safeguard macroeconomic stability and add momentum to structural reforms. 

According to the press-release of the IMF Tbilisi office, these include approval by parliament of a revised 2003 budget to close a fiscal gap estimated at 1.7 percent of GDP [up to 135 million Lari]; an immediate halt to the accumulation of domestic budget arrears and the development of a plan to securitize the outstanding obligations; prompt passage of the government tax reform bill, simplifying the Tax Code without any net revenue loss; and increase of electricity tariff.
 
The government members will have to brief the IMF headquarters in Washington D.C. on fulfillment of the fund’s recommendations in the end of August.

Observers say that the cutting of the budgetary expenditures by 95.5 million Lari (approximately USD 45 million) will position the government perfectly for a clampdown of the opposition that argues the government corruption and inefficiency are the root causes for the budget deficit.

The issue of cutting expenditures will have to be discussed by the Parliament, as requested by the IMF mission. However, the government has the right to cut down funds within the 10% of the total budget independently, without the Parliamentary approval. Thus in any case, regardless to the Parliaments decision, budget cuts are inevitable.

The Parliamentary opposition already builds up muscle to face the debate on budgetary cuts.  “We will not vote for cutting the expenditures. We will demand the government to be held responsible [for a shortfall] and [will call for] resignation of the government,” MP David Koguashvili of the New Rights faction said at the news briefing on July 9.

“State Minister was responsible for meeting the budgetary targets, thus we will demand Avtandil Jorbenadze’s [the State Minister] resignation,” MP Mikheil Machavariani of the United Democrats faction said at the news briefing on July 10.

The United Democrats party also intends to sue the government for its failure to implement legislation passed in May on raising the minimum salary to 35 Lari (USD 16). The increase was to have taken effect on 1 July, but has fallen victim to the budgetary shortfall.

The government has not much to show in defense. The data of the first 6 months of the 2003 shows the budget revenues fell short of target by 87 million Lari (approximately USD 41 million). There are little grounds for optimism for the coming 6 months as well. The Parliamentary Committee on Taxes and Revenues estimates the government should collect 120 million Lari ($57 million) each month to avoid even further budgetary cuts at the end of the year. Experts say taking into account past figures, this would be nearly impossible.

“I am sure that for the end of the year the sequestered budget will have to be cut down again. I think this second reduction would be between 35 and 50 million Lari,” Roman Gotsiridze, head of the Budgetary Office of the Parliament said at the news briefing on July 10.

The cuts also widen rifts within the government. The Ministries and departments do everything to safeguard their budgets, and the protest is loudest at the defense and security establishment, which is posed to accommodate the largest cut – by 20 million Lari. The Defense and the Interior Ministries were already underfunded by 12 million and 11.5 million Lari respectively in the first six months, and the ministers are losing patience.

Georgian Defense Minister David Tevzadze said on 10 July that cutting of the defense expenditures would cause “irrevocable damage of the Georgian armed forces, as a result of which the entire defense system may collapse.”

For comparison, the Parliament’s funding will be reduced by 1.5 million Lari, the President’s Investment Fund – 5 million, cultural programs – 1.5 million, embassies – 1.8 million, agricultural projects – 4.4 million.

Reduction of transfers to the local budgets by 8 million Lari is yet another grim issue. Promises of these transfers helped the government secure the votes of independent MPs elected from the provincial constituencies for the 2003 budget in the beginning of this year.

“Voting for cutting the budgetary expenditures would equal defeat in the elections for every independent MP elected from the regional constituencies,” says MP Mikheil Machavariani of the United Democrats faction. 

Revision of the 2003 budget also implies increase of incomes by 38.3 million Lari (approximately USD 18 million). Observers say the process might be even more painful for the government than cutting budgetary expenditures.

The government plans to introduce amendments to the Tax Code as recommended by the IMF. This will include imposing new tax on mobile phones and communications, increase of taxes for gambling businesses, open markets and outdoor trading. The government believes that these measures could bring 38 million more Lari to the budget. Observers say that it seems almost impossible to approve this kind of amendments to the Tax Code in the Parliament, as there are influential lobbies of these businesses in the Parliament.

These interests will be backed by ordinary people, who are posed to protest increase of prices on mobile communication, almost the only viable communication tool covering most of Georgia, as well as outdoor trade – a frequently the only source of revenue for many impoverished families.  

Experts say that if the government could collect taxes from the oil products, there would not be any need of introduction of the new taxes. The budget lacked 40 million Lari in the first half of the 2003 as a result of the government’s failure to collect taxes only from the imported petrol.

“It is planned to compensate uncollected taxes from oil products by increasing [other] taxes. This is not a realistic approach. Apparently such recommendations were given by IMF based on government’s request,” Roman Gotsiridze, head of the Budgetary Office of the Parliament said.

Implementing unpopular measures seems to be not favorable for the government, as the elections loom. But it would be impossible to pave the way for a rescheduling of Georgia’s obligations to the Paris Club due in 2003, without IMF’s assistance. While the budgetary shortfalls and underperformance became customary for the Georgian government, current developments put all odds against the ministers and it seems the fate of at least some of them is sealed.

By Nino Khutsidze, Civil Georgia