Georgia enjoyed robust growth of around 10 percent in 2022. Reflecting this strong performance, the current account and fiscal deficits narrowed appreciably. While trending downward since the middle of last year, inflation remains elevated.
With growth expected to ease this year against the background of unusually high uncertainty, policy priorities include sufficiently tight monetary policy, exchange rate flexibility, and a further building up of fiscal and foreign exchange buffers.
With risks to the outlook high, preserving policy credibility is critical. Recent action to amend the National Bank of Georgia (NBG) law to change the NBG’s management structure risks undermining the authorities’ hard-won credibility. Any changes to the central bank’s governance framework should be carefully contemplated and follow a deliberative consultation process to ensure that central bank independence and credibility are safeguarded.
Washington, DC: An International Monetary Fund (IMF) team led by Mr. James John held meetings in Tbilisi during February 13-17, 2023, to discuss recent economic and financial developments and progress on reform priorities. At the end of the visit, Mr. John issued the following statement:
“The Georgian economy grew strongly in 2022 at around 10 percent, reflecting limited adverse spillovers from Russia’s war in Ukraine, buoyant tourism, a surge in war-related migrant and financial inflows, and a rise in transit trade through Georgia. These factors boosted fiscal revenues, significantly narrowed the current account deficit, and supported foreign exchange reserve purchases and the lari.
“Headline inflation decelerated in the second half of 2022, helped by falling commodity prices, lari appreciation, and slowing credit growth, owing to earlier rate hikes, macro-prudential measures, and tightening global financial conditions. Nevertheless, headline inflation remains well above the NBG’s target, while core inflation and inflation expectations inched up in January due to strong domestic demand and rising housing rents, driven largely by migrant inflows.
“Growth is expected to ease in 2023 to around 4 percent due to subsiding migrant and FX inflows, slowing trading partner growth, and an appropriately restrictive fiscal policy stance.
“Strong revenues supported significant progress on deficit reduction in 2022 and the 2023 budget aims to reduce the deficit to 2.8 percent of GDP, in compliance with the fiscal rule. Continued efforts on revenue mobilization and public investment management as well as development of a medium-term revenue strategy will create space for priority spending including infrastructure investments. Successful implementation of the SOE governance reform and renewable energy development strategies developed last year would enhance productivity in these sectors and limit fiscal risks.
“Continuing the gradual disinflation process this year and reaching the NBG’s inflation target of 3 percent by mid-2024 would require an appropriately restrictive monetary policy stance and continued strong credibility in the NBG’s independence. In this context, the NBG’s commitment to exchange rate flexibility, a build-up of reserve buffers, and a strong and resilient financial sector is welcome. The NBG should continue to carefully assess inflation dynamics and be ready to raise interest rates further if there are signs of high inflation becoming entrenched.
“Recent action to amend the National Bank of Georgia (NBG) law to change the NBG’s management structure risks undermining the authorities’ hard-won credibility. Any changes to the central bank’s governance framework should be carefully contemplated and follow a deliberative consultation process to ensure that central bank independence and credibility are safeguarded.
“We would like to thank the authorities and other counterparts for their warm hospitability and productive discussions. The team met with Governor of the National Bank Gvenetadze, Minister of Finance Khutsishvili, Minister of Economy and Sustainable Development Davitashvili, other senior officials, and representatives of the private sector and the donor community. We look forward to continuing the dialogue in the coming months in the context of the second review of Georgia’s IMF-supported economic reform program.”