IMF Warns of ‘Downside Risks’ to Georgia’s Economy

International Monetary Fund said it saw “considerable downside risks” to Georgia’s economic outlook and recommended that the authorities “should stand ready to adapt their economic policies as warranted.”

The IMF executive board said on March 27 in its review of Georgia’s economy, that with the double impact of the August 2008 armed conflict and the global crisis economic growth “suffered a dramatic decline” from 12.4% in 2007 to an estimated 2% in 2008, after a sharp contraction in the second half of 2008.

“The combined shocks to the current and capital accounts are likely to be larger and more prolonged than originally expected, increasing the external adjustment challenge and diminishing near-term growth prospects,” IMF said.

The Fund also said that it supported the Georgian government’s policies involving to contain the economic slowdown through a donor-financed fiscal stimulus and a reorientation of expenditures from imported defense goods toward “essential productivity-enhancing infrastructure investment and better targeted social spending.” It also welcomed the authorities’ moves to achieve greater foreign exchange flexibility.

The IMF executive board completed on March 24 the second review of Georgia’s performance under an 18-month stand-by arrangement totaling USD 705.3 million. The completion of the review allows for the immediate allocation of USD 186.6 million as part of the 18-month program.

IMF welcomed the Georgian authorities’ plans to move to foreign exchange auctions “as an important step to achieving greater exchange rate flexibility and protecting international reserves, which are relatively low.”

It noted that “the real effective exchange rate is overvalued.”

“Over the medium term, the authorities’ commitment to exchange rate flexibility and structural reforms to enhance competitiveness should help correct the overvaluation, and reduce vulnerabilities posed by the large underlying current account deficit,” IMF said.

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