VZCZCXRO6859
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSI #0442/01 0771335
ZNR UUUUU ZZH
R 171335Z MAR 08
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 9104
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 TBILISI 000442 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EEB/IFD/OMA 
STATE PASS USTR FOR PAUL BURKHEAD 
COMMERCE FOR DANICA STARKS 
 
E.O. 12958: N/A 
TAGS: ECON PGOV USTR GG
SUBJECT: IMF MISSION UPBEAT ON GEORGIA'S ECONOMIC PROSPECTS 
 
REF: A. TBILISI 190 
 
     ¶B. TBILISI 387 
 
¶1.  Summary: A March IMF mission to Georgia led by IMF senior 
advisor for the Caucasus David Owen offered a surprisingly 
upbeat assessment of Georgia's economy during a briefing of 
diplomats in Tbilisi at the conclusion of the mission. 
Overall, Owen said, "the economic outlook is pretty strong." 
He predicted nine percent growth in 2008.  He believes the 
government can achieve lower inflation and a reduced budget 
deficit as well.  Owen discussed, without undue concern, the 
government's plans to create new sovereign wealth funds, 
issue Eurobonds for the first time, mandate a budget surplus 
and inflation targeting by the central bank and establish a 
new financial regulatory agency.  End Summary. 
 
¶2.  Owen said that the mission came to Georgia at the request 
of the GOG, which wanted an independent assessment of the 
economy in the wake of the political turmoil in late 2007. 
The mission's conclusion was that the loss of confidence in 
Georgia's future was short-lived and that capital inflows 
have been stronger than expected.  Owen said that foreign 
direct investment (FDI) in the fourth quarter of 2007 was at 
a record level, and total FDI for in 2007 was USD 2.2 
billion, also a record mark for Georgia.  (Note: Ministry of 
Economic Development figures are somewhat lower, but still 
strong at USD 1.7 billion.)  Owen said that the IMF is 
predicting nine percent real GDP growth in 2008, despite the 
current difficult global economic situation.  The IMF's 
prediction is much more than the five or six percent used by 
the Government in its budget projections for the year. 
 
¶3.  Georgia has done a better job controlling inflation than 
many Asian countries, Owen said.  Nevertheless, increases in 
food and energy prices, coupled with a fairly loose monetary 
and fiscal policies contributed to the year-end inflation 
rate of 11 percent.  This means that controlling inflation is 
the main challenge for the government and the central bank, 
he continued.  The government has announced its intention to 
rein in spending, cutting the government's consolidated 
budget deficit from five percent of GDP in 2007 to two 
percent in 2008 -- and actually a small surplus, if 
privatization income is counted as revenue.  Spending on 
defense and infrastructure will go down while social spending 
will increase, although spending as a whole will be 3-4 
percent less than in 2007.  The GOG's agenda is one of 
smaller, less intrusive government.  However, the 
government's plans for cutting taxes may be difficult to 
realize because of continuing pressure to spend on social 
needs, he added.  The central bank is increasing interest 
rates and allowing the lari to appreciate as well, in order 
to keep inflation in check.  There is a good chance the 
government and central bank can meet their target of 8 
percent inflation in 2008.  Owen said inflation may "blip up" 
in the short term because some months of price deflation 
early in 2007 will drop out of the calculation of 
year-on-year inflation as the year progresses. 
 
¶4.  The IMF team spent some time examining the package of 
economic measures now under consideration by Parliament.  The 
trend of the new laws is toward a rules based framework for 
economic policy, Owen said.  Inflation targeting by the 
central bank and a fiscal surplus by the government (counting 
privatization income as revenue) would be mandated by law. 
Owen thinks that requiring a surplus is rather rigid, and 
perhaps unrealistic given political realities, but he credits 
the government for wanting to lock in strong fiscal 
performance.  Similarly, he remarked, legislating inflation 
targeting by the central bank is an unusual step, although 
the IMF has often recommended such targeting for economies 
like Georgia.  Two sovereign wealth funds are to be created, 
reducing the temptation to spend revenues diverted into them 
immediately.  Owen said that in fact the law does not offer 
very many circumstances for spending the funds at all.  He 
stressed that the funds must be well-managed, transparent, 
and invested in high-quality assets in order to succeed.  He 
also noted that Georgia's resources for funding the special 
funds are smaller than ever, with Georgian Railways and Poti 
port being the only really major privatizations left.  He 
said the government has a large number of small companies it 
is willing to sell, and expects its privatization revenues in 
2008 will amount to two percent of GDP (very roughly USD 160 
million).  In the case of the railroad, the plan is to sell 
10 percent of the shares and transfer the rest of the 
government's shares to the Future Generations fund. 
Georgia's desire to establish a sovereign wealth fund is 
somewhat unusual, he said, because they are more commonly 
established in major oil-producing countries with big revenue 
 
TBILISI 00000442  002 OF 002 
 
 
streams to fund them. 
 
¶5.  (Note: Post in the past has been concerned about the use 
of extrabudgetary funds to permit spending outside the 
control of the parliament, most notably a Presidential fund 
that was funded by "contributions" from entities wishing to 
avoid prosecution for corruption shortly after Saakashvili 
took power in 2004.  Such funds have now been all but phased 
out.  The currently proposed special funds bear watching, but 
their funding sources and their management are more clearly 
established by law than the previous ones.  We understand 
their expenditures are to be authorized by parliament, and 
that disbursements would be made into the overall government 
budget.  The law on the Future Generations fund contains 
detailed requirments for its oversight, including responsible 
management and independent audits.  The law on the Stable 
Development fund is sketchier and assigns the central bank to 
manage it.  The Embassy will be alert for signs of trouble in 
both of these funds, if they are created.  End Note.) 
 
¶6.  The IMF's main concern is that the central bank's 
independence be preserved, Owen said.  Central bank 
independence and accountability is a good thing, he added, 
but the with a new requirement that the bank president be 
dismissed if inflation exceeds 12 percent for six quarters, 
parliament is setting up a harsh regime.  Parliament wants to 
continue to approve the instruments and policies of the 
central bank on an annual basis, but the bank management is 
being forced by law to take responsibility for the outcome. 
 
¶7.  The GOG is preparing to issue USD 500 million worth of 
its first dollar-denominated Eurobonds.  Owen is skeptical 
about the need for such an issue.  He said the GOG's stated 
reason for the issuance is to establish a sovereign interest 
rate benchmark that can be used to set rates for private debt 
issuances.  However, the government is also in need of 
liquidity, he said.  The proceeds of the Eurobonds will be 
expensive.  While the government has suggested the money will 
be used to fund a transmission line and gas storage, more 
recently we were told by Energy Minister Khetaguri that is no 
longer under consideration (ref B).  Owen said he was told by 
the GOG the proceeds of the Eurobonds would not be spent in 
2008 and are likely to go into the two new extra-budgetary 
funds.  He doubts the GOG will be able to earn as much 
through the funds' investments as the Eurobond money costs to 
borrow.  However, he said, the government knows this and 
still seems to believe establishing the benchmark is worth 
the cost. 
 
¶8.  Post's econoff asked Owen if he was concerned about the 
quality of commercial banks' portfolios of loans, since 
banking assets grew another 70 percent in 2007.  Owen 
acknowledged that such rapid growth deserves careful 
supervision.  He noted plans to create a combined financial 
regulatory agency under the central bank to oversee banks, 
brokerages and insurance companies.  Under the current bank 
regulatory scheme in the central bank, he said, there has 
"clearly been a deterioration" in supervision.  The 
government's intention by creating the new, more independent 
regulator is to strengthen supervision.  He noted that this 
is an about-face from earlier half-hearted efforts by the 
government, under the influence of former State Minister for 
Reform Kakha Bendukidze, to emphasize freedom of commerce 
over strong bank  supervision.  The combined financial 
regulator is a reasonable basis for better supervision, he 
said.  Similar agencies exist in other countries and the IMF 
does not find grounds for concern in its creation. 
 
¶9.  Owen said there is still a need for a more reliable base 
of statistics in Georgia.  The Statistics Department, which 
recently has come under the aegis of the Ministry of Economic 
Development, used to be independent.  Owen said it is not 
clear what status for the agency is ideal.  Finally, he told 
the gathered diplomats that there are no plans for a future 
IMF program in Georgia, after the Poverty Reduction and 
Growth program ended on schedule last year. 
PERRY