Georgia : Advancing Economic Stability and Sustainable Livelihoods Program (Subprogram 1)

Project Name

Advancing Economic Stability and Sustainable Livelihoods Program (Subprogram 1)

Project Number

57099-001

Country / Economy

• Georgia

Project Status

Proposed

Project Type / Modality of Assistance

• Loan

Source of Funding / Amount

Loan: Macroeconomic Resilience and Social Protection Program

Source	Amount
Ordinary capital resources	US$ 50.00 million

Operational Priorities

• OP1: Addressing remaining poverty and reducing inequalities
• OP2: Accelerating progress in gender equality
• OP3: Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
• OP6: Strengthening governance and institutional capacity

Sector / Subsector

• Public sector management / Public expenditure and fiscal management - Reforms of state owned enterprises - Social protection initiatives

Gender

Effective gender mainstreaming

Description

The proposed program will help the Government of Georgia strengthen resilience to external shocks by improving the performance management of state-owned enterprises (SOEs), deepening local capital markets for effective public debt management, and enhancing the social protection system. The program will build on the foundation laid by earlier programs of the Asian Development Bank (ADB) in the country to improve fiscal resilience and social protection. The program is in line with ADB's country partnership strategy for Georgia, 2019-2023, and is also aligned with ADB's Strategy 2030 operational priorities (OPs): (i) OP1 on addressing remaining poverty and reducing inequalities; (ii) OP2 on accelerating progress in gender equality; (iii) OP3 on tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability; and (iv) OP6 on strengthening governance and institutional capacity.

Project Rationale and Linkage to Country/Regional Strategy

Sound macroeconomic management. Georgia's economy has grown steadily since it attained upper middle-income country status in 2015, supported by reforms to liberalize the economy and strengthen transparency and accountability. Georgia's economy expanded at an average of 4.7% during 2011-2019, and gross domestic product (GDP) per capita reached $6,672 in 2022, making Georgia an upper middle-income country according to the World Bank. Growth was driven by the external sector, with contributions from exports and spending on public infrastructure. With the onset of the coronavirus disease (COVID-19) pandemic, the economy shrank by 6.8% in 2020, but real GDP growth rebounded to 10.5% in 2021, when domestic consumption became the main growth driver with the gradual winding down of the fiscal stimulus. The economy expanded by 10.2% in 2022, primarily driven by a notable increase in the number of Russian citizens entering the country and robust export performance. However, economic growth is expected to moderate in 2023 and 2024. Despite the government implementing strict monetary measures and reducing the fiscal deficit, demand-side factors have contributed to inflationary pressures. The deceleration of domestic demand coupled with more stringent macroeconomic policies are anticipated to mitigate inflationary pressures. Substantial inflows of foreign capital have significantly narrowed the current account deficit, but it is projected to widen again in 2023 and 2024. ADB projects growth to slow considerably in 2023, to 4.5%, because migrant and financial inflows are expected to subside, and as slower growth or recession in trade partners inhibits export growth and cuts money transfers. Growth should reaccelerate to 5.0% in 2024 with continued gains in services.

The public financial management systems in Georgia are strong and have improved with the implementation of the Public Financial Management Reform Strategy, 2018-2022. Robust treasury operations and cash management enable expenditures to be managed within the available resources, while control of contractual commitments is effective, resulting in limited expenditure arrears. However, despite robust public financial management systems, exposure to fiscal risks continues to threaten the government's fiscal position. To address this, the government is committed to improving institutional capacity for adequate oversight and mitigation of key fiscal risks to strengthen fiscal resilience.

Exposure to fiscal risks stemming from state-owned enterprises. Georgia's SOEs are a net draw on the budget and a significant source of fiscal risk. The approval of the Rule on Financial Oversight of SOEs in June 2022 significantly increased the capacity of the Ministry of Finance (MOF) to limit soft budget constraints that SOEs enjoy, including the requirement for MOF approval for any new investment of borrowing higher than GEL5 million (or 1% of the value of enterprise assets, whichever is less). However, the absence of a framework for identifying and compensating public service obligations combined with weak corporate governance of SOEs continue to pose a significant fiscal risk. SOE activities also hold significant potential to increase climate risk, because SOEs do not integrate climate considerations into their decision-making processes. The MOF completed a sectorization exercise in March 2020, which identified, according to international standards, SOEs that are essentially commercial (i.e., public corporations) and SOEs that are essentially noncommercial (i.e., general government entities). Since then, the government has undertaken significant efforts to reform public corporations, supported by ADB, the International Monetary Fund, and the World Bank. However, there is still no agreed framework for the treatment of noncommercial SOEs. The absence of a framework for general government entities carries grave fiscal and governance implications.

Fiscal exposure to climate risk. Climate change poses a significant threat to fiscal stability in Georgia. Overall, climate change in Georgia could reduce GDP per capita by an estimated 13% by 2100, and public debt could reach 111% of GDP by 2069 in the absence of structural reforms to accommodate climate risk in public financial management systems.

Excessive exposure to currency and refinancing risk. The government relies extensively on foreign currency borrowing to meet public financing needs. High levels of external government debt increase public exposure to currency and refinancing risks, heighten vulnerability to external shocks, and limit the effectiveness of fiscal and monetary policies in mitigating the effect of such shocks.

Public exposure to demographic risk. Georgia's share of the population eligible for universal pensions under the current policy arrangements is set to increase from 21.2% in 2021 to 27.6% in 2040, raising pension expenditure to over 10% of GDP. While the universal pension plays a significant role in poverty reduction, particularly for women, who comprised 71.5% of recipients in 2021, maintaining the real value of universal pension payouts would increase the primary deficit by 1.9%-3.3% of GDP by 2069.

Absence of unemployment insurance. The absence of an unemployment insurance scheme in Georgia carries significant fiscal implications because it amplifies dependence on alternative budget-funded social protection schemes. Moreover, the absence of an unemployment insurance scheme may hinder economic recovery during recessions or economic downturns. Further, the lack of an unemployment insurance scheme can hinder the government's ability to implement proactive labor market policies and interventions.

Reform area 1: Corporate governance and performance management of state-owned enterprises strengthened.

Reform Area 2: Public debt management improved.

Reform Area 3: Social protection in a fiscally sustainable manner enhanced.

Impact

Outcome

Outputs

Geographical Location

Nation-wide

Safeguard Categories

Environment

C

Involuntary Resettlement

C

Indigenous Peoples

C

Summary of Environmental and Social Aspects

Environmental Aspects

Involuntary Resettlement

Indigenous Peoples

Stakeholder Communication, Participation, and Consultation

During Project Design

During Project Implementation

Contact

Responsible ADB Officer

Masood, Sana

Responsible ADB Department

Sectors Group

Responsible ADB Division

Public Sector Management and Governance Sector Office (SG-PSMG)

Executing Agencies

Ministry of Finance

Timetable

Concept Clearance

10 Oct 2023

Fact Finding

21 Apr 2024 to 21 Apr 2024

MRM

03 Jun 2024

Approval

-

Last Review Mission

-

Last PDS Update

19 Oct 2023

Funding