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IMF talks about COVID-19 pandemic's impact on Georgia’s economy

Business Materials 16 September 2020 11:25 (UTC +04:00)

BAKU, Azerbaijan, Sept.16

By Tamilla Mammadova – Trend:

The COVID-19 pandemic has had a major impact on Georgia’s economy, said International Monetary Fund (IMF) Mission Chief for Georgia Mercedes Vera-Martin, Trend reports via Georgian media.

An IMF team, led by Vera-Martin, held virtual meetings in Georgia during September 8-14, 2020, to discuss recent economic and financial developments and progress with the structural reforms. The team met with Governor of the National Bank, Koba Gvenetadze, Minister of Finance, Ivane Matchavariani, other senior officials, and representatives of the private sector.

"While the health impact of the pandemic has been well-contained, the external position has deteriorated as tourism revenues have come to a virtual standstill. Preliminary data suggest a tentative recovery in domestic demand beginning in June. Growth in credit to the private sector remains robust, partly supported by government subsidies on lari-denominated mortgages. Slack demand and the post-lockdown recovery in supply have recently put downward pressures on inflation," she said.

According to Vera-Martin, growth is expected to contract by 5 percent, a slightly higher contraction than at the time of the Sixth Review, partly reflecting a more severe slowdown in the second quarter of 2020 and a more protracted recovery in external demand. Given pervasive uncertainty about the pandemic, downside risks to the outlook dominate. The realization of these risks, including from a more prolonged slowdown in major trading partners and a slower-than-envisaged recovery in tourism, may require continued exchange rate flexibility and additional policy support, she said.

As she noted, prudent macroeconomic policies prior to the pandemic, including the build-up of external and fiscal buffers, and strong support by the international community allowed the authorities to launch a sizable fiscal package to mitigate the social and economic impact of the pandemic. The government expanded social transfers, enacted temporary tax relief measures for businesses and households, and provided some subsidies to sustain activity in the sectors most affected by the shock.

Over the medium-term, addressing the decline in revenues in 2020 will be important to formulate a gradual fiscal consolidation, as required by the fiscal rule, and build fiscal space for needed spending on education and infrastructure. On the structural fiscal reforms, the mission welcomes the continued commitment to enhance tax administration, expand the coverage and monitoring of fiscal risks, and formulate a strategy to improve the corporate governance of state-owned enterprises.

“The National Bank of Georgia (NBG) has also taken several measures to support economic activity and financial stability, including lowering the policy rate. At the onset of the COVID-19 shock, the NBG eased capital and regulatory requirements, provided lari and FX liquidity, and preemptively requested additional provisioning for banks. In response to declining economic activity and easing inflation pressures, the NBG appropriately reduced its policy rate. Maintaining exchange rate flexibility remains essential to manage the shock," Vera-Martin said.

As reported, the implementation of structural reforms under the EFF has progressed well. Parliament approved the legislation to index basic public pensions in July, and the new insolvency law is expected to be approved soon. Timely implementation of the legislation related to corporate insolvency and banking resolution will help improve the business environment and financial sector resilience. Structural reforms remain essential to limit the scarring in Georgia’s medium-term economic potential and promote higher and more inclusive growth.

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