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Georgia: IMF Demands Put Government In A Quandary Ahead Of Elections

The International Monetary Fund (IMF) last week issued an ultimatum to the Georgian government: Improve reforms, or risk losing millions of dollars in assistance. The IMF's actions are adding pressure to an already heated election campaign season and have left President Eduard Shevardnadze facing a predicament.

Prague, 15 July 2003 (RFE/RL) -- With less than four months until the 2 November parliamentary polls, Georgian President Eduard Shevardnadze and his cabinet have a difficult decision to make. Either they must take highly unpopular steps toward reform, or risk losing the support of their main lender, the International Monetary Fund (IMF).

At stake is the final installment of a three-year Poverty Reduction and Growth Facility (PRGF) program worth $141 million. Without it, Georgia may have difficulty rescheduling its mounting foreign debt to its Paris Club creditors. The IMF paid Georgia a $23 million PRGF tranche last July. But since then, it has suspended payments, saying Tbilisi has failed to meets its financial-reform targets.

Tom Dawson, the head of the IMF's external relations department, told reporters in Washington last month the IMF had found serious fiscal problems in Georgia. "There is a fiscal gap that we have identified on the order of about 1.5 percent of [gross domestic product], and I think a revised 2003 budget needs to be developed. Energy sector issues are the centerpiece for the structural reform agenda, especially prospects for increasing utility collections, which are significantly below target," he said.

There is no direct link between Georgia's talks with the Paris Club and its relations with the IMF. But financial experts believe a failure to get the final tranche of its PRGF program could increase Tbilisi's risk of defaulting on its roughly $1.5 billion foreign debt.

The IMF's Dawson last month made it clear the fund's assessment would be crucial in attempting to persuade the 19-member club to reschedule Georgia's debt. "The [Georgian] authorities' relationship with the Paris Club is [that] they are supposed to maintain current payments with the Paris Club without regard to the present status of the [IMF] program. A successful review under the PRGF is what allows the Paris Club to go forward for additional relief. So I think that is the logical order in which to look at that," Dawson said.

An IMF mission recently spent two weeks in Tbilisi for talks with Georgian officials. Upon its departure on 7 July, the delegation gave Shevardnadze and his team until 15 August to meet its recommendations.

Under the IMF targets, the Georgian cabinet must revise its 2003 budget, improve tax collection, raise electricity tariffs, amend its Tax Code, and put the state pension system in order. The fund's executive board will then meet in early October to decide whether to release the final installment of Georgia's PRGF loan.

On 10 July, Reuters news agency quoted Jonathan Dunn, the head of the IMF mission in Tbilisi, as saying the Georgian government would lose the promised tranche if it failed to meet the fund's recommendations by mid-August. Should that happen, Dunn added, the government would be forced to negotiate a new PRFG program with the IMF next January. Officials at the IMF, both in Tbilisi and Washington, were not immediately available for comment.

Shevardnadze has responded to the IMF ultimatum. The Georgian president yesterday told reporters a revised draft budget, based on the IMF's recommendations, will be sent to lawmakers for discussion as early as this week.

Shevardnadze said he anticipated a heated debate in parliament and cautioned the opposition against exploiting Georgia's financial difficulties for political gain.

"It is difficult to say what the outcome of the parliamentary debate will be. I know the discussion will be heated and many demands will be made -- including, perhaps, that the entire government be dismissed. Maybe a few unpleasant things will be also said about the president. But I do not believe dismissals will be of any help. Suppose we dismiss the finance minister. We've already had seven or eight finance ministers in the past. Unfortunately, we often make those kinds of decisions in a hurry. We start talking about dismissing a minister when he is just beginning to sort things out. [Finance Minister] Mirian Gogiashvili is still new in this job. But he is competent, and I don't believe his removal or any other kind of sanction taken against him would help replenish the budget," Shevardnadze said.

Opposition legislators have already warned they will not approve the revised budget and some of them have threatened to propose a censure motion against the cabinet.

In addition, United Democrats lawmaker and former Tax Minister Mikhail Machavariani told reporters on 10 July his party would sue the government for failing to meet its pledge to raise the minimum salary.

The 2003 budget initially envisaged a raise in minimum salaries to 35 laris a month (approximately $16) starting from 1 July. But a shortfall in revenues forced the government to withhold the measure.

Government figures show that the budget deficit for the first six months of the year stands at 87 million laris (about $40 million), or 1.7 percent of the GDP. Opposition leaders believe that with the IMF now pressing for additional cuts in budget spending, the scheduled salary increase is unlikely to happen anytime soon.

The new draft budget sees a 98 million-lari ($45 million) reduction in public expenditure while envisaging a 37 million-lari ($17 million) rise in state revenues. Under the revised finance law, parliament, the president's office, and the Culture, Agriculture, and Foreign ministries all reportedly will be required to reduce their operating budgets.

But other ministries are likely to be affected too. Speaking to reporters today, Justice Minister Roland Giligashvili -- who recently faced harsh criticism after dozens of inmates escaped from Georgian prisons -- said he disagreed with the proposed cuts.

"Given the present conditions in the penitentiary system, it is very difficult for me to agree with [the proposed budget cuts]. We will continue to discuss the issue tomorrow and [the Justice Ministry] will officialize its position. We'll see what happens then," Giligashvili said.

The most substantial budget cuts will reportedly affect the Defense Ministry and other power structures. Of all the former Soviet republics, Georgia is believed to have the most poorly funded army. Defense analysts argue that military corruption is largely responsible for the impoverishment of the Georgian Army. But they also acknowledge that the cash-starved government is unable to meet the army's demands regardless.

Following the departure of the IMF mission, defense officials once again denounced the chronic lack of funds and asked Shevardnadze and the National Security Council to urgently address the issue. Army Chief of Staff Joni Pirtskhalaishvili warned that further delays in properly funding Georgia's army would eventually undermine its efficiency.

Speaking to reporters on 10 July, Defense Minister Lieutenant General David Tevzadze said he opposed cutting defense spending to meet the IMF demands. "We have no information regarding the extent of the proposed budget cuts or how they will affect the Defense Ministry. Budget cuts and all related issues are a political decision and we have no way of interfering. But, of course, we negatively assess the whole idea," he said.

Tevzadze also complained about an estimated 40 percent shortfall in funding for the first six months of this year, saying the circumstances had forced him to cancel a number of important defense programs, including military exercises scheduled for late June.

He said that from January until June, the 20,000-strong army received only 21 million laris ($10 million) instead of the budgeted 34 million laris ($15.6 million).

By comparison, the United States last year launched a two-year, $64 million program to train and equip a Georgian antiterror army force that numbers just 400 men.

The IMF has demanded that the budget of Georgia's armed forces be reduced by 20 million laris ($9.2 million) this year. Deputy State Minister Giorgi Isakadze today said the breakdown of the cuts between the Defense, Interior, and State Security ministries had not yet been finalized.

"With regard to budget reductions for the power ministries, we are talking about 20 million laris. Some ministries will see their budget cut by 6 million, others by 7 [million]. In the 2003 budget, each ministry has its own budget line. Therefore corrections will be decided on a ministry-by-ministry basis. 'Power ministries' is a very abstract notion and we will have to be more specific. The Finance Ministry will prepare all necessary documents within the next two days," Isakadze said.

Proposed cuts in the defense budget are not the only controversial aspect of the IMF demands. Some in Georgia have also expressed concern at a new draft regulation under which companies would be no longer be taxed according to their profits, but according to their turnover. Georgian state television yesterday said the IMF is also recommending tax exemptions for businesses whose turnover does not exceed 100,000 laris ($46,000) a year -- triggering resentment among directors of large companies.

Parliament speaker Nino Burdzhanadze, who has ties with the opposition, yesterday promised entrepreneurs that lawmakers would not take any steps that could harm Georgia's economy.

But Shevardnadze, in a clear warning to his opponents, said he reserved the right to confront legislators over the revised budget in order to save his cabinet ahead of the autumn elections. "I may or may not agree with the parliament's [final] decision. If I disagree, it is clear to everyone what will follow," Shevardnadze said yesterday. He added, "I am not prepared to let the government and ministers down."