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Georgia: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility—Supplementary Information

Author(s):
International Monetary Fund
Published Date:
June 2004
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1. This supplement provides an update on economic and policy developments since the issuance of the staff report. These developments do not change the thrust of the staff appraisal.

2. Paris Club creditors agreed on May 26 to consider Georgia’s request for debt rescheduling in mid-2004, thereby providing the requisite financing assurances for the proposed PRGF-supported program.

3. All prior actions specified under the program have been met (Table 1). In particular, on May 11, parliament adopted a budget for 2004 that is in line with the parameters agreed with staff. The budget law features receipts that are slightly higher (0.1 percent of GDP) than originally projected, stemming in part from a slight upward revision in foreign grants. With spending kept essentially at the originally agreed level (despite minor changes in composition), the general government deficit on a commitment basis was lowered by a similar amount. In early April, the authorities closed all revenue transit accounts in the banking system and established a single treasury account (part of the end-June structural benchmarks).

Table 1.Georgia: Status of Prior Actions
MeasureStatus
1.Secure approval by parliament of a sound 2004 budget in line with the parameters agreed with the mission.Done. On May 11, parliament adopted a budget for 2004 in line with the parameters agreed with the February 2004 mission.
2.Establish an Excise Tax Inspectorate.Done. The Inspectorate was established by ministerial order on March 25, 2004.
3.Prepare a customs reform and anti- smuggling strategy paper formulated by the Ministry of Finance in cooperation with other government agencies.Done. The paper was submitted to IMF staff on May 11.
4.Register all small-scale (‘teakettle’) refineries for excise duty purposes.Done. All 23 small-scale refineries have now been registered with the Excise Tax Inspectorate.

4. The State Department of Statistics (SDS) has just released an upward revision in the real GDP growth rate for 2003, to 11.1 percent (compared with the original estimate of 8.6 percent), based on a particularly strong showing of the construction and agriculture sectors, as well as preliminary results for Q1 2004 pointing to year-on-year growth of 9.5 percent. A recent STA mission concluded that the SDS data are generally sound, but proposed a number of improvements in the estimation of national accounts from the expenditure side.

5. Macroeconomic performance in the year-to date has been strong (Table 2). Q1 general government tax revenues exceeded the program estimate by a wide margin (although the results for tobacco and fuel excises were slightly lower than expected, prompting the authorities to intensify their efforts to stem evasion in this area). Year-on-year, general government tax revenues in the first four months of 2004 increased by 28 percent, and state budget revenues (central government and extrabudgetary funds) over January to mid-May 2004 increased by 42 percent. The buoyancy of receipts has allowed the authorities to reduce domestic expenditure arrears by some GEL 30 million during the first quarter of the year, well in excess of the original estimate. Credit expansion in Q1 2004 was also lower than the program estimate, owing in part to the larger-than-expected buildup in government deposits at the NBG as a result of the strong revenue performance just mentioned. Broad money grew by 21 percent in the 12 months to April 2004.

Table 2.Georgia: Performance at End-March 2004
Cumulative Changes Since

End-December 2003
Original EstimatesPrel.
(In millions of lari)
General government tax revenue (incl. special funds)312.9331.7
Cash deficit of the general government (GG)54.1 1/-4.8
Domestic expenditure arrears of the GG-6.3-29.5
Tobacco and petroleum revenues39.037.8
Net credit of the banking system to the GG (NCG)18.27.1
Net domestic assets (NDA) of the NBG18.4-51.2
(In millions of U.S. dollars)
Net international reserves of the NBG-3.630.4
Contracting or guaranteeing of
A. Nonconcessional medium- and long-term external debt0.00.0
B. Short-term external debt (less than one year)0.00.0
Accumulation of external arrears0.02/
(In millions of lari)
Reserve money10.714.1
(In percent)
Average monthly cash collection rates (CCR)
CCR from Direct Customers of the wholesale market (GWEM)85.070.7
CCR from the General Government95.067.7
CCR from UDC customers18.018.6
CCR from Tbilgazi customers25.021.8

Cash deficit adjusted for unanticipated external project finance.

In the period January-April 2004, Georgia accumulated US$11.7 million in principal arrears but remained current on interest payments. By providing financing assurances, the Paris Club indicated its intention to clear arrears to Paris Club members in the context of a debt rescheduling operation.

Cash deficit adjusted for unanticipated external project finance.

In the period January-April 2004, Georgia accumulated US$11.7 million in principal arrears but remained current on interest payments. By providing financing assurances, the Paris Club indicated its intention to clear arrears to Paris Club members in the context of a debt rescheduling operation.

6. Tensions between the central government and Adjara, which had flared up in recent months, have been resolved after the provincial leader, Mr. Abashidze, stepped down and fled into exile in early May. A transitory administration under direct control of the President of Georgia has been installed, and elections for the regional legislature will be held in June. Adjara’s trade with the rest of the Georgia and exports through the port of Batumi have since been normalized, although some damage to infrastructure will need to be repaired.

7. In the energy sector, the authorities recently concluded discussions with the World Bank on credits that will finance sector restructuring, extension of the management contract for the state-owned power transmission company, and labor retrenchment costs associated with downsizing this company. Discussions are well advanced on the establishment of an agency to deal with legacy debt and KfW expects to tender soon for experts to help the government run this agency. Q1 2004 program estimates for utility bill collection rates were missed for all groups of customers, except for the major provincial power utility (UDC); political pressures against disconnection of nonpaying customers in the run-up to the March 2004 parliamentary elections apparently played a part, but the government has indicated that it is now fully committed to supporting sector reform efforts, and it has secured funding for metering and rehabilitation programs that should allow for a catch up in collection rates during the remainder of 2004.

8. The authorities have prepared a civil service reform concept paper that is being reviewed by the World Bank and other donors. The current draft envisages creation of common civil service rules across the three branches of government, competitive recruitment procedures, clear guidelines for dismissals for misconduct, and establishment of training programs for professional development.

9. Audits of three key SOEs (Georgian Railways, Madneuli Mining, and Poti Port) are now well advanced. The authorities expect the audits of the latter two to be completed by end-May, and the Railways audit to be finalized by end-June. Audit reports for all three enterprises will be published after completion.

10. An FAD advisory mission on tax reform is scheduled for early June. The team will build on a concept paper prepared by the government that calls for major simplification of the tax system. The government plans to send a tax reform bill to parliament by mid-July and to seek its approval by September, in time for preparation of the 2005 budget.

11. Following ratification by parliament last February of the Strasbourg Convention on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime to align Georgia’s Anti-Money Laundering (AML) drive with international best practice, the government formally sent the ratification instruments to the Council of Europe in early May. In a related development, a recent MFD mission advised the National Bank of Georgia on capacity building in the AML and combating the financing of terrorism (CFT) areas; the mission also advised on steps to facilitate secondary trading in government securities, including introduction of a primary dealer system, and the eventual design of a deposit insurance system.

12. Georgia has been selected as one of 16 eligible countries to benefit from the Millennium Challenge Account (MCA), a new U.S. government initiative to foster growth and alleviate poverty in low-income countries that display strong program ownership and are decisively tackling corruption. Staff from the newly-established Millennium Challenge Corporation are expected to visit Georgia shortly to discuss the authorities’ plans in that regard. Georgia has also expressed interest in participating in the G-8 Transparency Initiative, which seeks to help developing countries to strengthen institutions and enhance transparency in public financial management and accountability.

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