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Georgia: IMF Warns About Unpaid Debt But Praises Reforms

Washington, 15 September 1998 (RFE/RL) -- Georgia received approval for the final year of its three-year subsidized loan from the International Monetary Fund (IMF) this summer despite fund concerns over Georgia's accumulation of unpaid foreign debts.

The decision to approve the loan of around $74 million by the IMF's Board of Executive Directors -- the 24 officials representing all 182-member nations who conduct the fund's daily business -- was announced in late July.

But Georgia's annual review conducted by the board at the same time was only made public now. In that review, the board warned Georgian officials that the loan approval was made on the presumption that Tbilisi would reach a rescheduling agreement with Turkmenistan on payments falling due during 1998 and 1999.

The directors said they were giving Georgia the benefit of the doubt because despite the country's weak external position, it had completed debt rescheduling agreements on pre-1995 bilateral debt with all of its creditors.

But the directors also cautioned Georgia that because of its "onerous" external debt burden, it should not attempt to borrow on international capital markets, should work on increasing domestic savings and must continue to strengthen the nation's ability to service its debt over the medium term.

The review, called an article four consultation, included a note from the directors that despite important strides Georgia has made in implementing economic reforms and stabilizing its economy, it still faces "daunting economic challenges that need attention in the short and long run."

The IMF directors said Georgia must strengthen its fiscal adjustment -- efforts to balance the budget -- mobilize additional tax revenues and continue to work toward broadening the tax base while establishing an overall fairer tax system.

The directors welcomed Georgia's intention to eliminate all outstanding government payments arrears by the end of this year and to avoid accumulating new arrears. The government has also agreed to cut tax arrears, improve targeting of the social safety net and increase funds for health and education.

The directors said Georgia's ability to stabilize the nominal exchange rate has helped reduced inflation from hyperinflation levels in 1994 to single-digit levels in 1997-98.

Georgia was praised for taking steps to tighten banking regulations and supervision, noting that "resolute action" by banking supervisors is required to build a sound banking system.

The IMF directors also stressed the importance of Georgia pushing ahead on privatization of urban and industrial land, saying that the government's divestment strategy for the energy and other sectors of the economy were steps in the right direction.

The directors praised in particular the privatization of agricultural land and enterprises, coupled with banking, energy and legal sector reform, which they said had underpinned the authorities' effort to build a market economy.

In a background report prepared by the IMF staff, the fund said Georgia's privatization of medium and large-scale enterprises had accelerated in the second half of 1997 and that the government had established a competitive market for electricity generation and distribution.