The Executive Board of the International Monetary Fund (IMF) completed on a lapse of time basis the Eighth Review of Georgia’s economic reform program supported by a four-year extended arrangement under the Extended Fund Facility (EFF). This is the last review under the arrangement and its completion will release SDR 78 million (about $111 million), bringing total disbursements to SDR 484 million (about $687 million). BM.GE sat down with the Area Mission Chief of the International Monetary Fund (IMF) for a detailed interview on the prospects of the economic growth in Georgia and its future relations with the Fund.
Mr. John, thank you for taking my questions. I watched the press conference online. The IMF has doubled Georgia’s economic growth outlook to the target that Georgia also has for 2021 and that’s 7.7% - the highest forecast that I have seen so far from the IFIs. What is the reason behind this decision? And I’m asking this because when I talked with EBRD which has the lowest outlook so far for Georgia’s economic growth – the reason for that as they have explained in detail was because Georgia’s recent economic growth figures did not give a detailed idea about the structure of growth. What was the reason for the IMF to be optimistic about Georgia’s economic growth?
First of all, thank you for speaking with me today. This crisis had a heavy toll on the economy – the 6.2% decline, largest that we have seen since the 1990s. The government appropriately took the measures to support vulnerable businesses and households. But it’s been a difficult crisis. So then turning to the 2021 forecast, we see the growth gain the impressive momentum in the second quarter, and as I think you alluded to, this reflects the flash GDP releases and if we look to this in more detail, in the past flash GDP releases have been pretty good indicators of economic growth. So we take those into account. If you look at them there is a pretty broad base for growth – the main factor that goes into the flash GDP release is a VAT turnover, and that suggests that there is a pretty strong activity across the economy. Some of the factors that are supporting this strong growth are strong remittances, exports, early signs of rebound in tourism, and I would say maybe if we look at it a little bit during the pandemic a lot of people were not going out on spending so there is this pent-up demand. We also heard while talking to lots of people that there is more domestic tourism activity than it used to be. So when we look at April and May numbers those are quite strong, and that’s what contributes to 7.7% growth forecast. You know if you look at what the Ministry of Finance has submitted to the Parliament with the budget, they have an optimistic scenario – they think the growth may be even stronger. We are comfortable where we are with 7.7% based on what we’ve seen. But as more data come out we will take that into account and if needed we will revise our forecast. Even though our forecast has been upgraded substantially, there are significant downside risks. And we have still an environment of a greater than usual uncertainty. So the progress securing vaccines, accelerate vaccination – these are the key to controlling the pandemic and we have challenges with this Delta variant, and Georgia right now is the country that does not have a high level of vaccination – so that is the key risk and I want to highlight that controlling the pandemic is really important to realize strong economic outcomes.
The visit of the mission and the work of the mission, although online via ZOOM, it coincided with a quite stressful environment in Georgia. You follow the grave events on the political field, and of course I’m not asking you to make political statements here, but since you mentioned but since you mentioned COVID-19 and also, the uncertainty it has brought to Georgia and to the whole world –such examples as even one harmed tourist as a result of uncurbed violence in streets of Tbilisi – does that add to the uncertainty that you have mentioned and are such cases factored in the current economic growth outlook, and do you view them also as a downside risk to the 7.7% economic growth forecast?
Thank you for your question and maybe I can start by saying that we are saddened by the recent events including the death of a TV cameraman Lekso Lashkarava, and extend our condolences to his family. As noted in our concluding statement, if there were renewed political uncertainty this could affect investment and confidence. So it’s sort of not surprising that political stability is important for the economic stability and growth. So we include that as a potential risk. If I were to say, to look back to last elections there was a long political standoff that can affect the ability of the Parliament to undertake important reforms. It doesn’t help the ability to move forward in sort of key economic policy areas. So, we do highlight that as a risk – that’s not in our baseline – we have a pretty strong growth forecast – the number one risk is as I said the pandemic and the potential that it gets worse or the vaccination does not pick up as quickly as we need. Those are the main area risks. But after that we do mention the potential for renewed political uncertainty and that this is another thing to keep on our radar screen.
And also to be more precise – this 7.7% economic growth – this figure does not envisage any major lockdown, right?
Exactly. So we do our forecast and time when we do the forecast is our baseline view what we think is most likely to happen and so that’s 7.7% growth for this year 2021, and then we highlight potential risk to that forecast and we think that the most important risk that we see for the forecast is if the pandemic worsens - this could be because of the variants I have mentioned or if the vaccination process is not as good as we hoped, these are the things that could affect the forecast. There can be upside risks as well – I think we have factored in more of those in our forecast – we see the strong activity in the second quarter of 2021, factoring in the things like pent-up demand, with stronger consumer spending and businesses rebuilding inventories, etc. And then we have some downside risks that we have highlighted in our concluding statement.
IMF’s comments, decisions, statements have always been kind of an anchor for other IFI support as well. For example, Georgia’s judiciary reform came to the global agenda after the IMF had consistently included it among the structural reforms needed to ensure the appealing business environment – also among many other important reasons. Today we hear from the EU very clearly that another tranche for Georgia’s support which is 60 million euro is at stake because of the judicial reform not meeting the conditions as assigned by the recent so called Charles Michel agreement, and this criticism is also shared by the US Department of State. What is the IMF’s take on that?
Sure. Thank you for your question. We will leave it to the EU whether its conditions to financial support have been met including with respect to judiciary reform. But maybe to step back, having a transparent, efficient and impartial judicial system is important to the business environment for attracting investment and for strong private sector led growth. And other development partners, counterparts we spoke during the mission, and international assessments highlight the importance of judicial reform. We encourage the government to make the progress in this area to strengthen the business environment. So I think maybe that is the key point to takeaway that having an effective impartial and transparent judiciary is very important for the business environment. So we have encouraged progress in this area.
What are the main areas where the IMF sees that the Government of Georgia needs counseling needs advice and recommendations?
Coming out of the pandemic there are a lot of challenges. One of them is undertaking fiscal adjustment, while managing fiscal pressures and risks to comply with the fiscal rule. We view the fiscal rule as an important anchor for credibility. Another is for advancing state owned enterprise reform. This is an area that the government has made a good progress in the past and there’s more that could be done. Strengthening public investment management – is another priority. Government is spending quite a bit on capital projects – these are things like infrastructure projects, highways, etc. And as hopefully the pandemic recedes, we see the opportunity to reinvigorate structural reform progress. So this could be to address issues such as high unemployment and inequality – these are the long standing challenges in Georgia but the crisis has made them even worse. So we think these are the areas where more can be done. And then just on macro environment, another priority is to make sure the inflation comes down. We think the National Bank of Georgia is doing a good job there. We support its policy stance to bring the inflation back to the target of 3%, and also to maintain very strong regulation and supervision. Georgia did quite a bit to help cushion the blow of the crisis because it had the better position coming in and that reflected a lot of policy work done before, so rebuilding those buffers and making sure that they are still strong together with regulation and supervision – those are the key priorities.
Is the IMF helping the Government of Georgia on the 10-year development plan?
So, on a 10-year development plan – as I said we have just concluded the Article 4 consultations. And we discussed the broad range of policy issues that affect the country and very good dialogue, candid excellent exchanges and we expect that many of the topics that we discussed with the government will be part of the development plan. These include fiscal plans to enable spending and keep development priorities such as education and infrastructure but we are not advising on details of the plan itself.
I hope you will at some point because the contours that have been presented by the government so far from the first sight seem that they are adding more burden to the state budget while projecting average economic growth at 5-5.2%. I was listening to you during the press conference and you had this very specific focus on the need for fiscal consolidation and on the need for a sounder macroeconomic environment. When should Government of Georgia start cutting the expenses and do you think it is realistic to respond to the fiscal rule by 2023?
So as I said earlier the government responded appropriately during the crisis to provide households and businesses with the support to minimize their human and economic impact of this unprecedented crisis. And it’s just natural that with these expenses and declining revenue as the economy declined that the deficit and the public debt rose sharply. This is what we expected. One reason this wasn’t so concerning was of the fiscal rule and that the government was strongly committed to it and so it was a good anchor and it gave us the sense that this was a temporary increase in the deficit and debt. We were very encouraged to see the very strong commitment from the government to the fiscal rule. This is by 2023 getting the fiscal deficit below 3% of GDP, and debt below the 60% of GDP. The debt we expect will be below the 60% of GDP well before 2023, so the real challenge is to bring the deficit down. Some COVID-19 related costs - you understand that there are a lot of temporary costs attached to the crisis – these should go when the pandemic ends. But the government will still need to identify further revenue or saving measures and we have some recommendations. We recommend saving revenue windfalls if growth and revenue are stronger than expected this year. We recommend undertaking a tax expenditure review and strengthening tax administration both of which could yield additional revenue. We recommend strengthening public investment management to boost the efficiency of the capital spending. This is something I have mentioned before: A lot of infrastructure investments are going on and to make sure that these are high quality investments that have high return for growth, and also really to take into account spending pressures and risks that are adding to the budget. We see potential pressure areas such as pensions, education, and we see risks from SoEs and also potentially in the energy sector. The government’s fiscal risk statement has done a good job highlighting these risks. And so to control some of these risks we would suggest kicking action on SoE reform and also specifying the clear criteria in the power sector for deviations in the feeding premium scheme. We are confident. The commitment is really strong from the government. We do think that they can meet the requirements to the fiscal rule by 2023.
If the government starts taking consistent steps in this direction of fiscal consolidation but on the other hand we see that the outlook on the inflation has also doubled and NBG sticks to the strict monetary policy that you have mentioned is the right decision – is then 7.7% of economic growth still reachable?
Yes. Our 7.7% forecast does reflect recent monetary policy increases by the NBG. We are not at this time calling for any further rate increases. We think the NBG has responded accordingly to the risk of inflation and it stands ready to do more if needed but that’s not in our baseline. We see the inflation and the factors driving the inflation largely temporary. And so it is important to be vigilant and make sure that these temporary factors don’t translate into more lasting inflation. But as I said we think that these are temporary. Our inflation forecast sees inflation coming down significantly in 2022 as some of these temporary factors fade. There are a lot of aspects to the inflation that are very volatile – for example, food and energy prices. Often we look at the core inflation which gives slightly more stabile read on what’s going on with price developments, and the last two core inflations have come down a little bit. These are the small improvements but it’s giving us a little bit confidence that as I said these factors are temporary and there should be a reduction in inflation in 2022.
And my last question: Should we wait for the next program between the IMF and Georgia? Personally for me, it would show if the government is really ready for fiscal consolidation.
As I said we have just completed our Article 4 consultations, and there’s a great chance to continue our close dialogue and discuss challenges and policy priorities. This is not a program negotiation. But I will say there are a lot of policy areas where we see the broad common views with our counterparts in the government and the National Bank of Georgia. The Minister of Finance said very clearly that they would like another program. We stand ready to discuss the new program. This negotiation happens separately than the Article 4 consultation but we are ready to do that. We are not negotiating the program now so I cannot tell you exactly what will be in it but we share common views with the government, with the NBG so we have the common understanding what could be the basis for the future program.
Wonderful. Then there is the reason for our next interview.
I stand ready for that, hopefully in Tbilisi.
Yes, hopefully in Tbilisi.