Publication: Monitor Volume: 6 Issue: 104

Despite passing a series of measures in 1999 designed to improve its dismal revenue collection record, the Georgian government continues to suffer revenue shortfalls. In the first quarter of 2000, the government collected GEL122.7 million (US$62.3 million) in central government revenues, 14 percent less than projected (Prime News Agency, April 11). This followed shortfalls of more than 30 percent in both 1998 and 1999. Revenue shortfalls stemming from bureaucratic corruption, poor central control over the country’s external borders, and widespread tax evasion, have plagued Georgia’s public finances throughout the country’s post-Soviet transition. During this period, the government has generally responded to such shortfalls by cutting expenditures, particularly on fixed capital investment, a strategy which, while dampening growth in the budget deficit, has substantially threatened the economy’s long-term growth outlook. Worse still, budget cuts have not prevented the accumulation of expenditure arrears. By the end of 1999, arrears on public sector wages and pensions had risen to roughly GEL280 million (US$142 million), of which more than half were accumulated in 1999 alone (Reuters, January 31).

Tax revenue shortfalls have narrowed of late. After falling 22 percent below target in 1998, tax revenues fell just 6 percent below target in 1999 and were 4 percent above target in the first quarter of 1999 (Prime News Agency, April 11, 2000). Much of this improvement stems from Georgia’s strong export-driven recovery in the second half of 1999 and first quarter of 2000. GDP grew 4.4 percent in the first quarter (CIS Statistical Committee). Customs revenues, however, have remained woefully below target this year, despite solid growth in imports and despite efforts by the central government to combat widespread smuggling, particularly of oil products and cigarettes. In 1999, the Georgian government hired Britain’s ITS to supervise import customs control, but customs revenues nevertheless fell sharply below the level projected in the 1999 budget and were 48 percent below the target in the first quarter of 2000 (Sarke Information Agency, February 9).

The first quarter revenue shortfalls are likely to precipitate another round of budget cuts this year. Zurab Noghaideli, nominated for the post of Finance Minister in President Eduard Shevardnadze’s new government, announced that the government will need to cut GEL100-150 million in expenditures in the first half of the year (Reuters, May 16). Georgia’s continued revenue difficulties also suggest that the government will be unable to fulfill its pledge to reduce arrears by GEL110 million this year.

The government’s failure to meet its revenue projections and reduce wage and pension arrears is especially important given that the IMF has linked an agreement on a new credit facility to an improvement in Georgia’s fiscal performance. Unlike in 1999, when the impact of the Russian crisis prompted the IMF to lend to Georgia despite revenue shortfalls and rising arrears, the IMF is expected to press the Georgian government harder this year to strengthen revenue collection. With the release of World Bank credits contingent on an agreement with the Fund, delays in IMF lending this year threaten Georgia’s ability to finance its budget and current account deficits, raising questions about Georgia’s prospects for macroeconomic stability and growth this year.