Exchange rate flexibility allows Georgian lari to work as shock absorber

Business Materials 21 December 2020 11:01 (UTC +04:00)
Exchange rate flexibility allows Georgian lari to work as shock absorber

BAKU, Azerbaijan, Dec. 21

By Tamilla Mammadova – Trend:

Georgia’s performance under the Extended Arrangement has been positive, but the country is now facing a pronounced economic slowdown, Trend reports via the International Monetary Fund's (IMF's) report.

As reported, domestic and external demand remains weak, and service sector activity remains sluggish. Staff projects the economy to shrink by 5.1 percent this year followed by a gradual recovery.

The 2021 Budget will imply a mild contractionary fiscal stance. Importantly, fiscal support to households and businesses will remain in place to limit the impact of the crisis on the population and support a gradual recovery. Medium-term fiscal plans are anchored by the fiscal rule which calls for the fiscal deficit to reach 3 percent of GDP by 2023 and public debt to remain below 60 percent of GDP.

"Monetary policy should maintain its moderately tight bias to keep inflation expectations firmly anchored in the context of a depreciating lari. Exchange rate flexibility allows the lari to work as a shock absorber, but excessive volatility would prove disruptive to financial stability," the report said.

The proactive monitoring of financial risks and actions to preserve banks’ capital resources until the economy is clearly on the rebound would allow the banking system to support the recovery. Decisive implementation of structural reforms is critical to support the recovery and limit the scarring from the COVID-19 shock.

As the IMF note, mobilizing investment, advancing education reform, implementing the new insolvency framework, developing the local capital market, and judiciary reforms would further improve the business environment and support private sector-led growth.


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