IMF Recommendations - More Questions Than Answers
13 March, 2015
IMF Recommendations - More Questions Than Answers
Increasing certain taxes or budgetary spending cuts and continuing the floating exchange rate with limited interventions – these are the key recommendations the last mission of the International Monetary Fund gave to the Georgian government and National Bank, respectively. The IMF recipe is prescribed to the country with the purpose of absorbing the vast economic shock the Georgian economy has experienced after the 20 percent depreciation of its national currency that began in last year’s December.

Head of IMF mission
quite plainly advised both the government and the NBG to give up the blame game and work hand-in-hand to find solutions to the challenges.

But Georgian analysts think that rather than suggesting solutions to the problems the Georgian economy faces at the moment, the IMF recipe opens additional questions instead.
The IMF mission led by Mark Griffiths visited Georgia from February 23 to March 4 to assess the impact from developments in neighboring countries on Georgia’s economy and how best to overcome these new challenges. According to the mission is conclusion, Georgia’s economy has been hit by a combination of severe external shocks: the Russia-Ukraine crisis, the deepening recession in Russia (both of which keep sending ripples through the region) and currency devaluation in trading partner countries. Because of these shocks, Georgia’s exports are 30 percent lower than a year ago, and remittances from Georgian workers abroad are down 25 percent.
As a result, the Georgian economy will grow by a maximum of 2 percent this year instead of the previously forecast 5 percent. But even this projection is under risk if government does not carry out due structural reforms. The IMF recipe is to balance the eminent budgetary deficit by either increasing specific taxes or cutting down on budgetary spending; or, alternatively, to undergo both remedies at once.
“However, spending on a social safety net should be maintained and targeting improved to protect the vulnerable and the poor,” Mr. Griffiths said to Georgian media on March 4.
The IMF mission fully supports the NBG’s policy of refraining from intervening into the foreign exchange market and advises to keep the lari’s floating exchange rate in the future. Griffiths fully ascribed the currency’s devaluation to external shocks that had affected currencies of countries worldwide and advised both the government and the NBG to give up the blame game and work hand-in-hand to find solutions to the challenges.
However, there is something that impedes Georgian government in following the full package of the IMF recommendations. This something is the Georgian Constitution and the Act of Economic Freedom [an organic law] that prohibit tax rate increases or adoption of a new tax without holding a referendum. As for spending cuts, the Georgian government started working on a budgetary sequester long before the IMF conclusion. Social or important infrastructure projects will see no cuts: government will slash only administrative expenses.
“We do not intend to increase taxes,” Giorgi Kvirikashvili, Minister of Economy and Sustainable Development, said in response to the IMF recommendations. “We are even discussing reducing some of them.”
Georgian analysts think the IMF recommendations suggest no solution to the difficult economic situation Georgian economy faces at the moment; they consider them to simply be protecting the NBG.
“The IMF recommendations are more rhetoric than pragmatic,” says Soso Archvadze, an economic analyst, in an interview with Georgian Journal. “They sound like “it is good to be rich and healthy” but do not suggest any ways of how to be rich and healthy. They pose more question marks than suggest solutions. The Georgian government cannot share the recommendation of a tax increase because of the law restrictions and it is strange that the IMF gave out a recommendation that counters the law. It opens questions that I cannot find an answer to. As for monetary policy tools, it is completely up to the NBG and the government cannot interfere with this part. With our restricted monetary-fiscal arsenal in mind, I think the Georgian government copes with the crisis pretty well.”
Archvadze agrees that the external factors have dealt the lari a blow, but disagrees on the NBG’s policy being flawless: It did not use its full set of monetary policy instruments to balance out the external shocks and did nothing to defuse the market panic.
“The currency market is very sensitive to public agitation and speculative information and one of the key functions of central banks is explanatory work. That means coming out and explaining to the public what is going on, but head of the NBG did not do anything of sort. He acted like an outside observer,” Archvadze said.
Lia Eliava, a financial market analyst, thinks the IMF’s recommendations are far from the needs of Georgian reality at the moment and only justify the heavily criticized position and actions of the NBG.
“As a matter of fact, it was the inadequate policy of the NBG that led the country to the currency crisis,” she said. “To recommend Georgia increase taxes while it is prevented by law speaks of low professional skills of the IMF experts. As for the recommendation on spending cuts, this is a standard response by the IMF to all countries with transition economies, while every country requires an individual approach.”

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