IMF Assessments on Georgian Economy, Hit by ‘Severe External Shocks’

• ‘C.bank is doing a good job’;
• ‘Political attacks on c.bank not the best way forward’;
• ‘GDP growth may reach 2%, but even that is subject to risks’;
• ‘Govt has to keep budget deficit under control’;
• Govt will have to cut spending or increase taxes, or both;
• ‘Spending on social safety net should be maintained, targeting improved’;
• ‘Georgia is well placed to overcome the current challenges’;
• ‘Accelerate reforms and ease recent restrictions on foreign businesses’;

Hit by “severe external shocks”, Georgia’s economic growth could reach only 2% this year, but even this projection is subject to risks, said a mission from the International Monetary Fund, which visited the country on February 23-March 4.

The government, which less than three months ago set economic growth target at 5%, said last week that it would cut this year’s growth forecast to 2%. There was only 0.5% year-on-year GDP growth in January.

Crisis in Ukraine, deepening recession in Russia and currency devaluations in Georgia’s trading partner countries in the region led to decline in exports and remittances, resulting in lower foreign earnings and causing depreciation of Georgian currency lari (GEL), according to IMF mission, which visited Georgia to assess the impact from developments in neighboring countries on its economy.

Although GEL gained 6.8% over the past week to 2.1078 per U.S. dollar, it’s still weaker compared to 1.7542 in early November, before it started depreciation. At the peak of its recent depreciation on February 25-26, GEL had 29% of its value lost against U.S. dollar since early November.

Georgian exports declined 30% year-on-year in January and remittances were down by 23% y/y in the same month. Number of tourists in Georgia was 7.8% lower in January-February than year ago. The current account deficit increased to about 9.5% of GDP in 2014.

Although annual inflation was only 1.3% in February, far short of central bank’s target of 5%, it will likely pick up somewhat in coming months because of GEL depreciation, according to IMF.

Praising government for keeping the budget deficit to 3% of GDP in 2014, well below IMF’s ongoing program target with Georgia, the mission also said that for 2015 the government will need to take measures to keep the budget deficit “under control” as lower than initially forecasted economic growth will result in less than projected tax revenues in the budget.

“The government has appropriately taken steps in this direction, including by limiting employee bonuses and by taking efforts to contain administrative spending,” IMF mission said in a statement.

The government said it would cut administrative spending and revise the budget, but it has yet to present a detailed scheme.

Mark Griffiths, who led the IMF mission, said at a news conference in Tbilisi on March 4 that in order to limit the increase in the budget deficit, the government will have to cut spending or increase taxes, or the both.

“The problem is that budget deficit could increase so we need to limit that. I know that it’s not the best time to increase taxes, but the government has to choose which taxes to increase or which spending to cut… This is a difficult choice for them, but they have to do this,” he said.

The mission said in the statement that spending on the social safety programs should be maintained and “targeting improved to protect the vulnerable and the poor.”

“Because of its solid fundamentals, reform-minded authorities and the Association Agreement with the EU, Georgia is well placed to overcome the current challenges,” it said.

“We look forward to plans to accelerate reforms to make Georgia a more attractive place for doing business and for investing, for creating jobs, and for boosting growth in the future. These should include easing recent restrictions on foreign businesses, seeking out new private investment, boosting saving through pension and capital market reforms and raising education standards,” IMF mission said.

IMF ‘Fully Supports’ C.Bank’s Policy

IMF mission also said that it “fully supports” policy of the National Bank of Georgia (NBG) to “refrain from intervening in the foreign exchange market and to allow Lari to float.”
 
In a written statement on February 26, ex-PM Bidzina Ivanishvili accused the central bank and its president Giorgi Kadagidze’s “inaction and wrong actions” for GEL depreciation. He claimed that the central bank did not intervene sufficiently to help stop sharp fall of GEL and suggested that the central bank should have sold more U.S. dollars from its reserves. After Ivanishvili’s statement was released, some government members and representatives of the GD ruling coalition also voiced criticism of the central bank.

IMF mission said that central bank’s intervention “to resist shocks, that will likely be long-lasting, would only waste Georgia’s foreign currency reserves and slow the reduction of Georgia’s trade deficit with the rest of the world.”

Central bank’s reserves stood at USD 2.61 billion as of end-January. USD 120 million was spent from reserves as of February 24.

Speaking at the news conference Griffiths, who led the mission, said: “It’s important to avoid blame-game and to focus on solutions.”

“We need to protect independence of the central bank; they are doing a good job,” he said. “I think that political attacks are not the best way forward in this difficult time.”

IMF mission said in its statement that independence of the central bank should be “preserved and respected, so that it is free to pursue its main objective of price stability, and to make sure that the financial sector stays healthy, which will support long-term stable economic growth.”

“The government and the NBG need to work together now – in a way that respects each other’s areas of responsibility and central bank independence – on a comprehensive action plan to address these new challenges.”

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