Subir Lall - ‘the main priorities for the near term are to bring Covid-19 under control, ensure economic recovery and maintain macroeconomic policy discipline’
20 April, 2021
"The Georgian people have endured a difficult and truly unprecedented global crisis and fortunately we are now seeing the light at the end of the tunnel, although we have not left the tunnel yet. This has taken tremendous patience and courage, which we all applaud" - said Subir Lall, the acting Chief of IMF Mission for Georgia, during a video conference regarding the completion of the eighth review of the Extended Fund Facility supported program.
"The completion of the 8th and final review of this EFF program is an important milestone in the very fruitful and collaborative partnership between the IMF and Georgia.
The authorities’ home-grown reform program aimed to strengthen the fiscal position of the government and make the economy more resilient to shocks. Last year, the program’s size was augmented to help deal with the Covid 19 shock and for us in the IMF to do our part in ensuring the international community collectively was able to enhance its support for Georgia at this difficult time.
We feel that the evidence in light of the Covid 19 shock has shown how successful the program has been in improving resilience and creating buffers precisely for deployment when unexpected shocks occur. The original objectives of the program were broadly achieved, underpinned by specific reforms the authorities undertook during their steadfast implementation of the program throughout its 4 year duration.
Specific achievements include, to name just a few: improved tax administration and faster VAT refunds, a deposit insurance scheme to enhance financial safety nets, a law providing for automatic indexation of pensions, which should strengthen social safety nets, and a new second pillar of the pension system, which should mobilize domestic savings.
Overall prudent macroeconomic policies and the building up of external and fiscal buffers under the program meant that Georgia was in a stronger position to meet the COVID-19 shock. Were it not for this building up of resilience prior to the pandemic, the Georgian economy would have felt a much greater adverse impact due to the COVID 19 pandemic.
Naturally, the pandemic led to a significant rise in the fiscal deficit and debt as the government increased its support to businesses and households and as revenues declined. The current account deficit increased significantly as tourism revenues collapsed. This was a natural and expected outcome from this shock and the appropriate policy response to the shock.
I don’t need to remind you because you have lived through it, as we all have across the world, that repeated restrictions on movement and economic activity took a toll on economic growth. In Georgia, output contracted by 6.2 percent in 2020. We now expect the Georgian economy to resume growth this year and project output to expand by 3.5 percent this year, assuming no renewed lockdowns.
The main policy priorities for the near term are to decisively bring COVID-19 under control, secure the recovery, and maintain macroeconomic policy discipline in a challenging environment. In fact, these are the near term policy priorities for most countries in the world and in the region.
The National Bank of Georgia remains appropriately focused on achieving its inflation target which is a cornerstone of Georgia’s macroeconomic policy framework. In this context, the most recent policy rate increase responds to elevated inflation expectations following a somewhat prolonged period of inflation exceeding its target. Monetary policy faces a difficult trade-off between supporting the economy and ensuring inflation remains well controlled and the National Bank has been skillfully navigating this tradeoff in an environment that has challenged policymakers everywhere. Under the circumstance, we believe continued adverse external developments may necessitate further policy rate increases if the National Bank feels it is needed to keep inflation expectations firmly anchored.
We believe the floating exchange rate regime remains appropriate for Georgia. Maintaining macroeconomic policy discipline MS adhering to fiscal deficit and inflation targets would of course help contain depreciation pressures on the currency. But in addition to the level of the exchange rate, there is the issue of its volatility. Of course, we understand foreign exchange markets can become disorderly, which could be disruptive to financial stability as Georgia remains a dollarized economy. Here, the NBG’s foreign exchange interventions to avoid disorderly market conditions can help dampen volatility, but they are in our view appropriately not meant to defend any particular level of the exchange rate. Exchange rate flexibility is critical to ensuring that external shocks in a small open economy such as Georgia do not translate into greater volatility in output and employment. The exchange rate flexibility plays this critical role of shock absorber when shocks emanate from outside and are unavoidable and prevents these external shocks from excessively disrupting employment and output which would be detrimental to living standards, inequality and the risk of poverty.
The banking system entered the COVID-19 shock well-capitalized and with higher liquidity buffers; measures taken by the NBG in recent years improved the banking sector's capacity to withstand shocks. Credit growth has been resilient and bank capitalization remains broadly adequate notwithstanding an increase in non-performing assets and restructured loans. The NBG is actively monitoring the increase in non-performing loans and encouraging banks to promptly recognize losses. The buffers built in March 2020 from preemptive provisioning are still expected to be sufficient to account for the deterioration in asset quality due to the pandemic.
The 2021 budget and fiscal stance remains appropriate at the current juncture. The budget provides continued support to the economy, through temporary and targeted fiscal support measures and elevated capital spending, while also beginning the necessary convergence towards the fiscal rule. Fiscal support should not be withdrawn too quickly, which could weaken the economic recovery. If more fiscal support is needed due to a new wave of the pandemic, reprioritizing spending should be the first line of defense in our view. In the aftermath of the shock reducing the fiscal deficit and debt will be a priority. We welcome the authorities’ commitment towards medium-term fiscal consolidation in compliance with the fiscal rule. Georgia has built up an impressive track record of policy credibility and sound macroeconomic management and this will help maintain this credibility and strengthen it further.
Under the previous program, the government has made fiscal risks more transparent, notably by publishing a comprehensive annual Fiscal Risk Statement accompanying the budget. The next step is to reduce these risks, in particular by implementing the state-owned enterprise reform. We see a need to develop a comprehensive new governance framework covering establishing commercial objectives, performance management, and principles for competitive neutrality among other things. SOE reform will also ensure that the footprint of the state is limited to areas where there is a need for the provision of public goods and not in a way that crowds out the private sector. After all, it is ultimately the private sector alone, and most often new firms that get established and then grow, that create the most jobs, have the potential for a great improvement in living standards, and create the ability to enhance fiscal revenues for the sate to meet its social spending commitments and ensure the most vulnerable do not get left behind.
In line with this, broader structural reforms will be essential to sustain a durable, inclusive and job-rich recovery that is led by the private sector. The near-term priorities are operationalizing the insolvency framework, which should help to deal with the aftermath of the shock, and education reform. A comprehensive education reform should help address the problem of skills mismatches and limit scarring by eventually increasing job creation, productivity and wages in the aftermath of the pandemic. Structural reforms will help create the workforce of the 21st century and the environment for investment and growth that can fully take advantages of the opportunities offered by technological change, global trade, and Georgia’s very favorable location. This will help raise the living standards for all and ensure no one will be left behind as the economy takes off again when the pandemic is behind us.
Finally, and most importantly, the Georgian people have resolutely navigated what has been a difficult and indeed unprecedented global crisis and we are now seeing fortunately the light at the end of the tunnel, although we are not fully there yet. This has taken tremendous patience and courage which we all applaud. The Georgian authorities of course deserve all the credit for successfully completing this reform program supported by the EFF, and for skillfully navigating the economy through a very difficult global pandemic. Their efforts and credibility were also recognized by financial market participants as evidenced by the very successful Eurobond issue of yesterday. Congratulations to my dear friends the governor and minister and to their colleagues. And congratulations to the Georgian people for resolutely weathering this unprecedented pandemic and its economic fallout" - declared Subir Lall, the acting Chief of IMF Mission for Georgia.
Be reminded that the NBG Governor Koba Gvenetadze, Minister of Finance of Georgia Lasha Khutsishvili and Deputy Director of the Middle East and Central Asia Department of IMF Subir Lall made joint statements regarding the completion of the eighth review of the Extended Fund Facility supported program.