IMF Upbeat about Georgia’s Economy in 2006

Q&A with Head of IMF Middle East and Central Asian Department

A mission of the International Monetary Fund (IMF) paid a fact-finding visit to Georgia on February 8-15 to assess the current economic situation in the country and discuss Georgia’s performance under the Poverty Reduction and Economic Growth Program (PREGP), through which Georgia has already received USD 60 million between 2004-2005.

Civil Georgia interviewed John Wakeman-Linn, Division Chief at the IMF’s Middle East and Central Asian Department, who led the mission, on February 14 about the details of findings of this visit. John Wakeman-Linn said that 2005 was “a very good year” for the Georgian economy. “We anticipate 2006 to be another good year for the economy,” he said.
 
The IMF official noted that one of the challenges facing the Georgian government in terms of economic policy is the continuing need to improve the business environment. “There has been a lot of progress on that over the last two years but much more remains to be done – the government recognizes that,” he said.

Q.: Can you briefly outline findings of this recent mission?

A.: The purpose of the visit was to discuss with the government economic policies in 2006 and going forward, in the context of a review of developments of 2005 and 2006. 

Our assessment is that 2005 was a very good year for the Georgian economy – we estimate that real GDP grew at least 7.7% last year; inflation was up around 6.2% – a moderate level.  Fiscal policy was particularly strong last year, with the deficit much smaller than budgeted, largely because of the very strong revenue performance. In the span of two years Georgia has made a dramatic turnaround in its fiscal revenue performance, and that has really helped strengthen the government position and the economy. 

We anticipate 2006 to be another good year for the economy – we forecast growth to exceed 6% again this year and the authorities are targeting inflation at less than 6%; so this should be another good year for the Georgian economy.

In that context we have discussed what policies the government intends to implement in 2006.  This mission was trying to seek understandings of what we call “a memorandum of economic and financial policies” – the government’s statement of the policies they intend to implement next year, which is an important component of Poverty Reduction and Growth Facility [PRGF] that Georgia has with the IMF. 

We were able to reach understandings on that memorandum and so the intention is that the government will be submitting that memorandum to IMF management in mid-March and it will be considered by the IMF executive board in late March. Assuming the board endorses the strategy – which we anticipate they will – then the next tranche would be authorized for release, which is approximately USD 20 million.

Q.: What are those challenges which need to be immediately addressed by the authorities?

A.: I would say that from a macroeconomic perspective, one of the most important short-term challenges is to strengthen the ability of the central bank to implement monetary policy using various instruments.

Right now the only instrument the central bank has for influencing money supply is foreign exchange, purchases and sales.

The government recognizes that and the government and the central bank are close to understandings on an arrangement whereby the government would take a portion of its debt to the central bank and turn it into government securities of varying maturities which the central bank could then buy and sell to affect the money supply.  At the same time, the central bank would start issuing central bank CDs shorter maturities, which it could also use to affect the money supply. 

We think this would be an important step towards addressing one of the main challenges, because one of the difficulties Georgia is facing is – it’s a nice difficulty – is that in some sense, at time there is too much money flowing into the country and it creates a real challenge for monetary policy to keep inflation under control and not have too big a movement of the exchange rate.  And so these extra instruments will help them do that. 

The other challenge facing the government in terms of economic policy is the continuing need to improve the business environment.  There has been a lot of progress on that over the last two years but much more remains to be done – the government recognizes that. 

Q.: GEL rose last August significantly against the US dollar and experts assumed this was an attempt to prevent inflation against the background of increasing flow of money. Is the same anticipated this year?

A.: It is difficult, obviously, to predict what will happen with the exchange rates, but there may be continued upward pressure on the real exchange rate in Georgia.  The IMF has done some analysis on real exchange rates – not only in Georgia but in the region as well – and in the Caucasus countries in general our assessment is that the exchange rates right now are significantly below what we consider their equilibrium, their normal level. 

So the exchange rates, we think, will be moving over time to their equilibrium level; so there will be, we think, some real appreciation in Georgia over the medium-term.  Now how much there will be in 2006 – this is very difficult to say.  It depends, in part, on what sorts of capital inflows come in; on how much money comes in, in terms of foreign direct investment; things of this sort.

A.: What is the IMF’s position about the Georgian tax code and most importantly about the tax administration?
 
Q.: We think that the tax code that now exists is a dramatic improvement over the pre-2005 tax code.  It’s contributed quite importantly to the improvement in collections.  It is interesting that in 2005, while tax rates were cut substantially in a number of areas, tax collection actually rose. That is a sign both that the tax laws have got better, but also the tax administration has got a lot better. 

Having said that, the initial improvements are always the easiest ones – you find the most obvious problems and you fix those first.  Then to improve further, it’s trickier.  The IMF has, very recently, posted in Bishkek a tax administration advisor; but while he is stationed in Bishkek, he is assigned to work primarily on the Kyrgyz Republic and Georgia.  So the government of Georgia and the tax administration are now in the process of preparing some proposals on how they would use this tax administration adviser and what concrete things they would like his help on as they try to improve tax administration further. 

The tax administration advisor will work with Georgia and to a lesser extent in Tajikistan. He will travel to Georgia rather frequently to work with the tax administration.  He has just recently been appointed. 

Q.: The Georgian government plans trade liberalization through cutting the number of dues, as well as tariffs. What kind of effect this will have on domestic production?

A.: It’s my view that this trade liberalization strategy is an excellent move by the government; it will be very good for Georgia going forward.  Georgia is a small economy and its only hope for growing is effective integration into the global economy. This bold initiative to eliminate import duties will go a long way, I think, toward signaling to the international community that Georgia is open to the world, to global economy to do business.

I actually think that over the medium to long term it will be good for domestic business.  Yes, the people who compete with imports will have difficulties, but it will make it much easier for Georgia to expand its exports. And one lesson that has been learned, time after time, in every region of the world: protecting imports is not the way to grow, encouraging exports is the way to go.  I think this strategy will do a lot to encourage exports.  I think this will contribute dramatically to the growth of the economy.

Q.: And the last question is about banking system. Analysts say that high interest rates of the Georgian banks are inadequate to the current economic growth that may theoretically cause problems in prospects. What is your position?

A.: It is clearly true that interest rates are fairly high in Georgia, not necessarily in comparison to the neighboring countries, and there are very good reasons for that.  Georgia is in the situation of transitioning; developing a more market-based economy; developing competition in the banking sector – which will help bring down interest rates; developing better information systems which will allow businesses to compete for customers: for example, the establishment of the credit bureau could go a long way towards increasing competitiveness for  customers and driving down interest rates. 

There is also the need to improve, I think, the collateral systems, so that if customers do default it is easier for banks to collect.  So I think the high interest rates reflect both the limited competition and limited information and, thus, high risk. So both of those things need to be addressed to bring interest rates down.