International Momentary Fund (IMF) has warned the Georgian authorities to tighten fiscal and monetary policies to reduce current 14,5% inflation to 10% by the end of 2006.

An IMF mission, which visited Georgia on August 11-18 to assess recent economic developments, said inflation accelerated in Georgia to 14,5% by the end of July which is well above the planned targets and “poses a serious risk to macroeconomic stability.”

The 2006 budget set inflation rate at 5-6%. Twelve-month inflation was about 6% as of end-April 2006, according to IMF.

The National Bank of Georgian (NBG) reported 10% inflation in May, which was alarming news, as in December NBG President Roman Gotsiridze told parliamentarians while discussing 2006 draft budget that a major goal in 2006 was not to let the inflation rate reach two digit figures.

Officials cite mainly external factors, including rising energy prices as a reason behind the increasing inflation rate in Georgia.

“Gas price has increased, as well as price on electricity; in addition, oil price has increased, so these external shocks have coincided,” Roman Gotsiridze said in July.

In a statement issued on August 18 upon conclusion of its visit the IMF mission said that “sharp increase” in inflation reflects demand pressures in the economy resulting mainly from excess money supply.

In July the Georgian Parliament approved amendments to the 2006 state budget envisaging an increase of expenditures by GEL 323 million (USD 182,3 million). A large portion of this sum – GEL 212,5 million (up to USD 120 million) – was allocated to the Defense Ministry.

IMF mission has recommended that combination of expenditure restraint, a smaller deficit and slower growth of reserve and broad money would help reduce demand pressures.

“To this end, understandings were reached that would limit the overall fiscal deficit to 1.8 percent of GDP. Taken together, these measures should reduce inflationary pressure during the remaining months of 2006 and improve prospects of achieving end-2006 inflation of around 10 percent. For 2007, efforts to reduce inflation will be intensified,” the IMF mission stated.

In respect of other economic developments, the IMF mission hailed the Georgian authorities’ efforts to secure reliable supplies of energy for the near term, but urged the government “to be mindful of the macroeconomic risks still posed by strained economic relations with Russia.”

“Against this background, the mission noted that such risks constitute another rationale for implementing a cautious fiscal stance that allows greater accumulation of international reserves.”

The mission also hailed the authorities’ commitment to begin introducing a targeted poverty reduction program later in August. It also welcomed the ongoing improvement in bank supervision by the National Bank of Georgia. In this context, the mission stressed the need for prompt introduction of effective “fit and proper” criteria for bank owners, managers and administrators.

The IMF mission plans to recommend completion of the fourth review under the Poverty Reduction and Growth Facility (PRGF) arrangement, provided that macroeconomic management in the remainder of the third quarter is satisfactory.

The IMF's Executive Board approved a three-year, USD 150,3 million arrangement for Georgia in June, 2004.
 
It is anticipated that completion of the fourth review will be considered by the IMF’s Executive Board in late September 2006.