Page 18 - GEORptOct22

IMF makes huge revision to Georgian growth forecast
On the external side, despite the widening trade deficit, the current account balance is expected to improve in 2022, supported by tourism and by the large net money inflows. This unanticipated windfall from the conflict is nonetheless expected to subside by the end of the year.
Georgian authorities intend to reduce government debt to around 40% over the medium term while also increasing the share of domestic debt to close to 30%, which would reduce FX vulnerabilities and support capital market development. Authorities are also pursuing further tax administration improvements and a reduction in tax expenditures. Risks to this outlook are broadly balanced.
On the downside, persistent inflation coupled with the tightening of global financial conditions could impact the Georgian lari, potentially affecting macro-financial stability due to the high levels of dollarisation. The Russian economy could also suffer a more pronounced slump next year, affected by protracted conflict and sanctions, which would negatively affect tourism and remittances in Georgia. Domestic political uncertainty could increase volatility and affect business confidence, as well as the pace of planned reforms.
On the upside, money inflows could last longer than initially expected, and Georgia could benefit from some trade diversion as transport corridors are reconfigured.
The International Monetary Fund (IMF) has dramatically increased its forecast for Georgian growth from 3.2% to 9% for this year as “expected negative effects of the war in Ukraine have not materialised so far”.
At the end of a mission to Georgia from September 8-14, the IMF issued a press release on September 15 that reported that, “despite a challenging external environment, the Georgian economy is set to achieve strong growth and buoyant fiscal revenues this year”.
James John, leader of the IMF team, based the huge growth revision on a faster-than-expected recovery of tourism, a surge in inbound money transfers, and immigration-related flows that have helped strengthen the external position and sustain domestic demand.
However, he also urged caution, saying: “Uncertainty is unusually high, and there are notable downside risks including due to a sharper slowdown in major trading partners, tighter global financial conditions, possible weakening of tourism and other external inflows, and sustained high commodity prices. This difficult environment calls for maintaining prudent macroeconomic policies, notably exchange rate flexibility and a build-up of fiscal and foreign exchange buffers while ensuring inflation expectations remain well-anchored.”
Although headline inflation has begun to decelerate, it remains well above the National Bank of Georgia (NBG) target, the IMF pointed out.
It said that the NBG had used the fact that external flows were more favourable than expected to build external buffers by purchasing foreign exchange reserves. It advised that the NBG should continue to carefully assess inflation dynamics and be ready to raise interest rates further if there are signs of inflation becoming more broad-based or entrenched.
The IMF visit assessed reforms in state-owned enterprise governance, public
18 GEORGIA Country Report October 2022 www.intellinews.com