Washington, DC: On September 15, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Georgia.[1]This year the consultation also included a discussion of the findings of the Financial Sector Assessment Program (FSAP) exercise for Georgia.[2]
The COVID-19 crisis took a heavy toll on Georgia's economy. Domestic mobility restrictions necessary to control the pandemic and a slowdown in tourism drove the largest output contraction since the 1990s with the economy shrinking by 6.2 percent in 2020. Poverty and unemployment also rose, undoing much of the progress of recent years. The authorities appropriately responded by strengthening healthcare and providing substantial assistance to vulnerable households and businesses, aided by sizeable donor support. COVID-19 case numbers rose sharply in August before declining while vaccinations have accelerated.
The recovery has recently gained momentum with growth now expected to reach 7.7 percent in 2021. This is a significant upgrade from earlier expectations, and implies that output will exceed its 2019 level this year. Robust growth in remittances and exports, and early signs of a faster than expected rebound in tourism have supported the recovery and should contribute to a narrowing of the current account deficit compared to its elevated 2020 level. Inflation accelerated to 12.8 percent year-on-year in August, largely reflecting utility price increases, higher commodity and food prices, and elevated input costs, but is expected to decline rapidly in 2022 as these temporary effects fade.
Significant risks remain and contribute to an outlook that is more uncertain than usual. Chief among risks, COVID-19 variants or vaccination delays could derail the recovery by requiring new lockdowns and reducing external demand.
The Financial Sector Assessment Program (FSAP) found that the authorities' regulatory reforms in recent years and the policy actions taken following the COVID-19 shock have helped support financial sector resilience, including on account of strong pre-pandemic bank capital and liquidity buffers and profitability.
The authorities' macroprudential toolkit is comprehensive and includes measures to address the key risk from high dollarization, which complicates monetary policy and exposes Georgia's banks to credit risk from exchange rate shocks. These measures also aim to limit bank risks and reduce incentives for lending in foreign currency. Over the medium term, the authorities should consider tightening de-dollarization measures gradually, with the choice of measures and calibration informed by impact assessments.
The authorities follow a prudent supervisory approach. They have taken significant steps to strengthen the quality of supervisory oversight and financial safety net arrangements since the last FSAP in 2015. These include adoption of Basel III and a comprehensive update of the legal and regulatory framework for banking resolution and crisis management. Looking ahead, there is some scope to formalize internal procedures, including for bank resolution and crisis management.
Executive Board Assessment[3]
Executive Directors agreed with the thrust of the staff appraisal. Given the heavy toll of the pandemic, Directors emphasized that sustaining a strong pace of vaccinations is needed to bolster the ongoing recovery against further pandemic risks.
Directors supported shifting fiscal policy toward bringing down the deficit and debt, anchored by Georgia's fiscal rule. They noted that the better-than-expected recovery has helped finance additional healthcare services, and stressed saving further windfalls to provide a buffer against risks. Directors agreed that the authorities should seek to expand fiscal space and reduce fiscal risks by reviewing tax expenditures, strengthening tax administration and public investment management, and advancing SOE governance reform.
Directors welcomed recent monetary policy rate increases, which should help keep inflation expectations anchored. With inflation risks tilted to the upside, Directors supported further rate hikes if there are signs of high inflation becoming entrenched. They encouraged continued prudent use of foreign exchange intervention to prevent disorderly market conditions given risks from financial dollarization.
Directors commended the NBG's prudent supervisory approach, including financial sector reforms since the last FSAP and decisive actions during the pandemic. They urged formalization of internal supervisory processes and continued strengthening of assessments of banks' risk management and governance. They noted that any further tightening or recalibration of de-dollarization measures should follow a gradual approach informed by thorough impact assessments.
Directors welcomed the FSAP's findings that banks have sufficient capital to absorb credit losses from the pandemic under a baseline scenario, and that capital shortfalls in possible stress scenarios are expected to remain manageable. They agreed that the NBG should encourage banks to retain earnings until pandemic-related uncertainties subside and capital buffers are fully restored. Directors commended progress in upgrading the bank resolution and crisis management framework, and urged the authorities to implement a prompt corrective action framework for banks, and to stand ready to implement a bridge bank if needed. Directors noted consideration of a central bank digital currency, and underlined plans for a controlled testing environment that could uncover potential unintended consequences and economic and regulatory issues. They also stressed the need to address AML/CFT vulnerabilities.
Directors agreed that reinvigorating structural reforms is needed to sustain growth and make it more inclusive. They urged actions to tackle high unemployment and inequality including education reforms, a social protection review, and strengthened active labor market policies. Directors welcomed implementation of the new insolvency framework and stressed continued structural fiscal and judiciary reforms to improve the business environment.
Georgia: Selected Economic and Financial Indicators, 2019-2022 |
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[1]Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
[2]Under the FSAP, the IMF assesses the stability of the financial system, and not that of individual institutions. The FSAP assists in identifying key sources of systemic risk and suggests policies to help enhance resilience to shocks and contagion.
[3]At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
