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

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

BAKU, Azerbaijan, Nov. 11

By Tamilla Mammadova – Trend:

The COVID-19 pandemic has had a major impact on Georgia’s economy, Trend reports via the International Monetary Fund (IMF).

IMF staff team led by Mercedes Vera Martin conducted virtual discussions from October 5 to November 9, 2020, on the Seventh Review under the Extended Fund Facility (EFF) arrangement.

“Following productive discussions, the Georgian authorities and the IMF team reached a staff-level agreement on the conclusion of the Seventh Review of the EFF arrangement. Performance under the IMF-supported program was satisfactory in the first half of 2020. The agreement is subject to approval by the IMF management and the Executive Board. Consideration by the Executive Board is expected in December 2020. Completion of the review will make SDR 79 million (about $112.1 million) available to Georgia, bringing total disbursements under the EFF arrangement to SDR 406 million (about $576.4 million)," said Vera Martin after the conclusion of the mission.

According to her, the shock is expected to cause a contraction of 5 percent in GDP in 2020, one percentage point greater than projected at the time of the Sixth Review, on account of a more negative impact of the lockdown and a more protracted shock.

A the end of 2020 inflation is projected at 3.5 percent as high food prices during the lockdown have been fully offset by the decline in inflation after the reopening. The external position has deteriorated as tourism revenues came to a virtual standstill. The current account deficit is expected to widen to 9.7 percent of GDP in 2020, from 5.4 percent in 2019. Nevertheless, high remittances and lower imports have contained Georgia’s external financing needs, and gross international reserves remain at comfortable levels thanks to the augmentation under the IMF arrangement and donor financing.

The fiscal deficit is expected to widen on the back of lower tax revenues and fiscal support measures provided to support those impacted by the shock. Preliminary data suggest a tentative recovery in domestic demand began in June. Growth in credit to the private sector has remained robust, partly supported by government subsidies on lari-denominated mortgages. Slack in demand combined with the post-lockdown recovery in supply has recently put downward pressure on inflation.

Growth is expected to rebound to 4.3 percent in 2021 as the effects of the pandemic fade, but with considerable downside risks to the outlook. The revision in the 2021 growth outlook, from 5 percent at the October 2020 World Economic Outlook, is attributed to uncertainty associated with the regional conflict and the increased number of COVID-19 cases in Georgia. Inflation is expected to converge to the 3-percent target by end of 2021.

Medium-term growth is projected to remain unchanged at 5¼ percent supported by infrastructure spending and sustained structural reforms to increase productivity and enhance private sector-led growth. Macroeconomic policy discipline and donor support would keep reserves at an adequate level over the medium term.

The shock to tourism is expected to be protracted with tourism receipts assumed to recover to 2019 levels only by 2024. The current account deficit is projected at 5.5 percent of GDP by 2025, financed predominantly by FDI. The authorities envisage to use all policy tools available to limit further economic damage, if downside risks were to materialize.

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Follow the author on Twitter: @Mila61979356

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