Publication: Monitor Volume: 7 Issue: 97

During a recent visit to Tbilisi, a team of International Monetary Fund specialists recommended withholding the third US$12 million tranche of the country’s US$141 million loan until October. Although the Fund mission praised the Georgian National Bank’s monetary policies, it called on the Georgian government to raise electricity prices and to take measures to bring down the budget deficit.

This recommendation–which is likely to be accepted by the IMF’s board of directors in the coming weeks–represents a continuation of Tbilisi’s problematic relations with the Fund during 1999-2000. Georgia’s fiscal performance–which has been one of the worst in the CIS in terms of tax collection–deteriorated sharply as the aftermath of the Russian financial crisis in 1999 and drought conditions in 2000 suppressed economic growth and tax receipts. Revenue shortfalls that led the government to accumulate significant arrears on public-sector wages and pensions have come in for major criticism from the IMF. Georgia’s prospects seemed to have improved in this year, when in January the IMF offered Tbilisi a three-year Poverty Reduction and Growth Facility. In March, the Georgian government managed to restructure the country’s debt with the Paris Club, which promised to help ease budgetary strain. The Georgian government also adopted an ambitious economic program for the next three years aimed at accelerating growth and battling poverty, while at the same time dealing with the country’s fiscal problems. Prerequisites for obtaining the loan included satisfactory macroeconomic performance, parliamentary approval of a 2001 budget consistent with the government’s economic program, tax reform, the securing of financing guarantees from external creditors, the introduction of treasury accounts into the Defense and Interior ministries, the approval of anticorruption measures, amendment of the energy law and customs reform. The government aimed to eliminate all arrears within about three years.

But while progress has been made on many of these criteria this year, Georgia has once again been unable to meet its budget revenue targets. Tax collection has been higher than anticipated, surpassing the target by 1.6 million lari thus far this year, but customs collections fell short by 5.9 million lari in April alone. According to one Georgian official, the customs shortfalls can be explained solely by cigarette smuggling. Georgia’s difficulties in collecting customs duties stem mainly from the fact that the Tbilisi’s writ does not extend to much of Georgia’s borders. Extensive smuggling continues via regions in which the customs department’s presence is practically nonexistent: Abkhazia, Ajaria, South Ossetia and, increasingly, the Chechen-controlled Pankisi Gorge area. Georgia thus loses at least half of its potential intake of customs revenues, translating into over US$100 million per year. Georgian President Eduard Shevardnadze has recently warned government officials of the importance of meeting the May customs revenue targets. But Georgia’s border problems are likely to defy quick-fix solutions (Georgian news agencies, April 27, May 1-2; AP, May 10).