On March 18, the International Monetary Fund (IMF) released the preliminary findings of the IMF staff during its official visit to Georgia on March 6-18. The concluding statement, to the publication of which the authorities have consented, provides an overview of the economic situation in Georgia and suggests that the country should strengthen its resilience to adverse shocks by maintaining prudent macroeconomic policies, and raise its growth potential by addressing long-standing structural challenges.
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
Recent developments, outlook, and risks
The IMF notes that despite the economic crises following Russia’s invasion of Ukraine, Georgia’s financial inflows remain above pre-war levels, supporting “continued strong economic performance.” GDP stood at 7.5% in 2023 and is expected by IMF staff to decline to 5.7% in 2024, “with consumption playing a larger role supported by strong real wage growth and employment.”
Regarding inflation, the IMF states that the 0.4% reached in 2023 is expected to rise to 4% by the end of this year “as the impact of last year’s favorable external factors dissipates and the restrictive monetary policy stance is unwound”. The current account deficit is also expected to widen, from a historically low 4.5% of GDP in 2023 (mainly due to lower remittances from Russia) to 6% by the end of 2024.
The IMF notes that the 2024 budget targets a deficit of 2.5%, supported by higher revenues from corporate income tax (CIT) and new gambling taxes. This will finance higher spending on wages, social benefits and capital investment, while keeping public debt below 40% of GDP.
However, the expected downside risks include uncertainty about war-related migrants and financial inflows, potential reversals in migration and tourism, and geopolitical instability. A loss of momentum or backsliding in the reform agenda is also named as a downside risk. Upside risks include increased transit trade and investments, with shifting geo-economic patterns creating new trade opportunities, and EU candidate status sending a positive signal to investors, says the concluding statement.
Policy priorities
“Macroeconomic and financial policies should be geared towards ensuring strong, sustained, and inclusive growth, continued resilience in the face of an uncertain external environment, and the goal of making decisive progress towards EU accession,” suggests the statement.
Regarding fiscal policy, the IMF staff recommends “modest fiscal adjustments” supported by a focus on revenue enhancement, streamlined tax policies, and efficient spending. In addition, the implementation of reforms in state-owned enterprises (SOEs) and the development of renewable energy is crucial to boost productivity, limit fiscal risks, and align with EU principles.
The IMF emphasizes that the SOE law should ensure that the Ministry of Finance is adequately empowered to play a strong oversight role to monitor and mitigate fiscal risks, as well as limit the state’s interests in line with the Stand-By Arrangement signed in 2022. “Efforts to concretely reduce the state’s footprint in the economy need to be intensified.” The statement also says the authorities should proceed with the opening of the electricity market, which has been delayed again.
Regarding monetary and exchange rate policies, the IMF notes that continued exchange rate flexibility and reserve accumulation are necessary to guard against adverse external shocks, and that strengthening the governance and independence of the NBG is essential for the credibility of monetary policy. “In this regard, the NBG law should be amended to i) ensure a non-executive majority on the NBG’s oversight board, ii) clarify and strengthen the succession framework and board member qualification criteria, and iii) move from a presidential to collegial decision-making model.”
Financial sector resilience and structural reforms
The concluding statement highlights that the Georgian banking system is “well capitalized, profitable, and liquid but remains highly concentrated and dollarized.” It also underlines that “continued vigilance is needed against financial sector risks, including from capital inflows, virtual assets, and sanctions.”
The IMF notes that to foster robust growth, Georgia must improve education, productivity, infrastructure, and governance. This includes enhancing teaching quality, agricultural productivity, and land management, while also investing in transport, logistics, and energy.
“While Georgia ranks high in the region and among EU candidates regarding the rule of law and absence of corruption, recent years have seen some slippages in governance indicators. To ensure that governance standards strengthen and support improved competitiveness, Georgia needs to bolster its judicial system and strengthen the anti-corruption authority,” – notes the statement.
Also Read:
- 24/09/2021 – IMF: Georgia’s Economy Bounces Back, Reforms Needed
