Issue 5, 2018. October-November


IMF Upbeat on Georgian Economy

The International Monetary Fund has revised projects for Georgia's GDP growth in 2018, raising it from 4.8 percent to 5.5 percent. spoke with IMF Resident Representative to Georgia Francois Painchaud about the revised projection.

The higher projected growth "reflects Georgia's strong economic performance so far this year," IMF Resident Representative to Georgia Francois Painchaud told

"In particular, the economy has grown faster than expected, expanding by 5.5 percent (y/y) during the first seven months of 2018. Helped by supportive economic conditions in major trading partners, Georgia's exports have been robust, increasing by almost 30 percent (y/y) during the first half of 2018. Growth in remittances and credit has also positively contributed to Georgia's economic growth. With strong economic activity, the unemployment rate, while still stubbornly high, declined by 2 percentage points to 12 percent in 2018Q2," he said.

Global shocks

Painchaud noted that Georgia is not "immune to developments in the rest of the world," especially its main trading partners.

"Global trade tensions could dampen business confidence, trade across countries, and economic activity. Furthermore, market volatility in Turkey and the threat of additional sanctions against Russia could adversely affect economic prospects in those economies. Negative developments in Russia and Turkey, Georgia's second- and third-largest trading partners accounting for 15 and 8 percent of total exports in 2017, respectively, could undermine economic prospects in Georgia," he said.

He noted that to "bolster resilience to external shocks," Georgia should continue its prudent fiscal policy, as well as building up foreign exchange reserves and maintaining exchange rate flexibility.

"Efforts to promote diversification would also be beneficial. While Georgia fares well in terms of export market diversification, thanks to free trade agreements, Georgia's export product diversification is relatively low due to its narrow production base. Mobilizing FDI in export-oriented sectors would be instrumental to enhancing competitiveness, reducing external vulnerabilities, and generating broad-based growth. Increasing productivity, promoting innovation, and better institutions can help expand Georgia's current capacity to diversify its exportable products," Painchaud said.


He noted that dollarization has declined "significantly" in the country but remains high overall.

Painchaud added, however, that the government's larization measures, " together with higher economic confidence, prudent macroeconomic policies, and enhanced macroprudential tools," have yielded "positive results."

"Since December 2016, loan dollarization fell from 64 percent to 55 percent in July 2018, while deposit dollarization fell from 70 percent to 61 percent. The authorities have recently announced an increase in the reserve requirements on short-term FX deposits from 20 to 25 percent, which would further help with de-dollarization. The gradual de-dollarization of the economy signals increased credibility of the authorities' monetary policy framework in anchoring inflation expectations. Looking forward, concerns about dollarization should be addressed with targeted and market-based prudential measures that help internalize FX credit risks," he said.

Household Indebtedness

Painchaud also noted the government's steps to address "the rapid growth in household indebtedness."

"The National Bank of Georgia (NBG) has established a cap on loans to households without verifiable income (at 25 percent of banks' regulatory capital), awaiting upcoming regulations to promote responsible lending. The latter would include guidance on evaluation of income to assess the ability of a borrower to repay, and additional restrictions on payment-to-income and loan-to-value ratios to protect households from a high debt service burden. In addition, the maximum interest rate on loan, which has already been capped at 100 percent, will be further reduced to 50 percent," he said.

Painchaud added that the IMF "broadly supports" the responsible lending initiative.

"We understand that the industry has some concerns about the proposed policy. We would encourage continued and constructive dialogue between the industry and the NBG. Continued discussion may lead to an improved policy, that could strike a better balance between 'access to finance' and 'financial stability,'" he said.