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Georgia’s Economic Performance Remains Strong, but Downside Risks to the Outlook have Increased

The Executive Board of the International Monetary Fund (IMF) completed the Third Review of Georgia’s performance under the three-year extended arrangement under the Extended Fund Facility (EFF) on a lapse of time basis.

The completion of the review will release SDR 30 million (about $41.6 million), bringing total disbursements under the arrangement to SDR 120 million (about $166.3 million).The extended arrangement for SDR 210.4 million (about $291.5 million or 100 percent of quota) was approved by the Executive Board on April 12, 2017.

Program implementation through end-June 2018 was satisfactory. All end-June 2018 performance criteria were met—some with significant margin. All structural benchmark but one were observed, and the missed one was completed with a two-week delay.

Georgia’s economic performance remains strong, but downside risks to the outlook have increased. Inflation has stayed below the 3-percent inflation target in 2018, and the external position has strengthened. Higher revenues and lower investment resulted in a fiscal surplus through September 2018. Against the background of high credit growth, the authorities introduced regulations to limit household over-indebtedness. The banking sector remains well capitalized, liquid, and profitable, but dollarization remains high. Despite the positive outturns, the authorities need to remain vigilant to a deteriorating external outlook and to sustain reform efforts to promote more inclusive growth.

The agreed 2019 deficit appropriately targets a broadly neutral fiscal stance, while allowing for accelerating capital and social spending. Medium-term fiscal commitments, including those related to a comprehensive education reform, should be consistent with fiscal sustainability and supported by institutional fiscal reforms.

The inflation-targeting framework, combined with the floating exchange rate regime, continues to serve Georgia well. The current monetary policy stance remains appropriate. Efforts to build international reserves need to be stepped up given heightened external uncertainty and Georgia’s vulnerability to external shocks. Regulations to increase financial resilience are welcome but its impact on credit growth needs to be closely monitored.

Persevering with structural reforms is key to achieving higher and more inclusive growth. Priorities include adopting a new corporate insolvency law and a well-designed and comprehensive education reform.