EurasiaNet Business & Economics - IMF Sets Mid August Deadline for Georgian Economic Reforms

BUSINESS & ECONOMICS

IMF SETS MID AUGUST DEADLINE FOR GEORGIAN ECONOMIC REFORMS
Troy Etulain 7/14/03

The Georgian government and the International Monetary Fund remain at odds over ways to close the Caucasus country’s widening budget deficit, and over other measures to improve economic policy. The IMF has given Georgian officials until mid August to implement reforms in several specified areas. At stake for Tbilisi is not only direct IMF assistance, but also the Georgian government’s ability to reschedule its Paris Club debt.

An IMF delegation wrapped up a fact-finding mission to Georgia on July 7. At the conclusion of the visit, IMF representatives issued a memorandum stating that its ability to complete a final review of a nearly three-year-old Poverty Reduction and Growth Facility (PRGF) was dependent on the Georgian government’s willingness to carry out targeted reforms. The IMF set August 15 as the deadline for Tbilisi for reforms, including: trimming roughly 100 million lari (about $47 million) from the state budget; improving tax collection while simplifying the tax code; raising energy tariffs; and settling arrears to the state pension system.

If Georgia is unable to implement the changes, the IMF is likely to withhold the final tranche of a $31 million loan under the PRGF. Of far greater importance for Georgia, the IMF has threatened to withdraw its support for Tbilisi’s efforts to get its Paris Club debt rescheduled. Talks between Georgia and the Paris Club of creditor nations are scheduled to occur in September. If Tbilisi is unable to reschedule the debt, it faces a potentially budget-busting $50 million payment by the end of 2003.

"We’ve been trying to complete this [PRGF] review since November," IMF Resident Representative to Georgia Jonathan Dunn told EurasiaNet. However, Dunn stressed that the IMF "has left the door cracked open" for Georgia to make the demanded policy changes.

The IMF stance creates a quandary for Georgia’s government, as parliamentary elections loom in November. [For background see the Eurasia Insight archives]. Implementation of the IMF-mandated reforms could stir popular dissatisfaction, possibly costing President Eduard Shevardnadze supporters at the polls in November. Conversely, inaction by the government, especially concerning the Paris Club debt rescheduling, could create an even bigger public backlash. Either way, Georgia seems to be facing its last opportunity to implement reforms and avoid severe fiscal strain, possibly even default.

The current fiscal crisis is in large part caused by over-optimistic projections of revenues and income from the privatization of state property. In March, the IMF and government had agreed that the budget gap was about 1.5 percent of GDP. Over the following three months, however, the budget gap grew to 1.7 percent of GDP, and continues to expand.

According to Dunn, Georgia’s tax collection rate of 14 percent is the lowest in the Caucasus. "There are areas where a lot of revenue could be collected, but is not collected." The illegal import and sale of petroleum products is one such area. "Many persons are knowledgeable of the vast amount of smuggled petroleum products," asserted the American Chamber of Commerce’s Petroleum Advisory Group (PAG). "What most people are not aware of is that � upwards of $200 million USD could potentially be collected in revenue for the Georgian government."

Tbilisi also suffers from the fact that the central government is weak and has trouble exercising authority in many parts of the country. Tbilisi, for example, does not collect taxes from the autonomous region of Ajaria. According the Prime News agency, the lost revenue from Ajaria reaches an estimated 25 million lari (roughly $11.5 million).

"We [the IMF] have asked them [Georgian officials] to solve this problem," Dunn said. Thus far, however, Dunn remarked, the IMF has "not seen much progress."

Dunn dismissed rumors that the IMF might sever its relations with Georgia, asserting: "That’s not going to happen." The issue is one of cash-strapped country unable to pay off its debts. Even if Georgia fails to meet the new IMF demands, negotiations for a new program will begin after the dust from the November parliamentary elections settles.

Georgia’s first Poverty Reduction and Growth Facility (PRGF), signed in January 2001, will conclude January 11. Since its relationship with IMF began in 1992, Georgia has borrowed a total of roughly $450 million. Its total foreign debt today is over $1.7 billion, according to Prime News. Georgia’s debt to Paris Club members approaches $1 billion.

While Georgia is in trouble fiscally, it has a tight monetary policy and a stable exchange rate. Dunn expressed the belief that Georgians are showing more confidence by converting less of their income into foreign currencies. "More and more are willing to hold lari in their pockets," Dunn said.

Editor�s Note: Troy Etulain is a freelance journalist based in Georgia.

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