Georgia: Strengthening Public Finances, the Social Safety Net, and Competitiveness

Challenge

In 2008–09, Georgia was hit with the dual shocks of the August 2008 conflict with Russia and the global financial crisis. Investor and consumer confidence deteriorated and foreign direct investment, exports, remittances, and bank lending contracted. Economic growth fell sharply to 2.3 percent in 2008 and a contraction of 3.8 percent in 2009, from growth in excess of 9 percent between 2004 and mid-2008. Georgia found itself with thousands of new internally displaced persons (IDPs) and thousands more hurting from the loss of jobs and income. The authorities were faced with the dual challenges of mitigating the impact of the economic downturn in the short term, and facilitating recovery and preparing Georgia for post-crisis growth in the medium term.

Approach

The Bank responded in 2009–11 with a series of three DPOs amounting to US$175 million in highly concessional budget support to back key objectives of the government’s policy reform agenda. The DPO series supported a macroeconomic and fiscal framework that included effective fiscal stimulus to restore confidence and mitigate the downturn in 2009, followed by quality fiscal adjustment to safeguard sustainability as economic recovery took hold in 2010–11. The structural policy reforms supported included improvements in: (i) the efficiency and effectiveness of public finances to better target public expenditures on mitigating crisis impact, facilitating recovery, and creating the conditions for post-crisis growth; (ii) the effectiveness of the social safety net to cushion the impact of the downturn on the vulnerable; and (iii) external competitiveness to ensure that a vibrant and competitive private sector sustains economic recovery and serves as the engine of post-crisis growth.

Results

The reforms supported by the DPO series contributed to a number of important outcomes:

• The social safety net was strengthened to support poor and vulnerable segments of the population during difficult economic times. Around 440,000 people received targeted social assistance in 2011 (compared to 370,000 at the end of 2008), with an increased benefit for additional family members. Similarly, roughly 900,000 people received targeted medical insurance in 2011 (compared to 750,000 at the end of 2008), and an outpatient drug benefit was added to the insurance package.
• DPO-backed tax, customs, and trade-related reforms helped strengthen competitiveness and bolster investor confidence. The share of electronic tax filings increased markedly (from 1 percent in January 2009 to more than 85 percent by end-2010), reducing tax compliance costs for businesses. Improved risk management helped lower the costs of customs clearance and trading across borders, with the share of customs declarations subject to physical inspection (red corridor) down from 13 percent in January 2009 to 5 percent in January 2011. As a result of progress in identifying and implementing select trade-related reforms to improve access of Georgian products to international markets, the European Union (EU) decided to begin Deep and Comprehensive Free Trade Area (DCFTA) negotiations with Georgia in early 2012.
• As economic recovery took hold, fiscal adjustment was implemented in 2010 and 2011 to safeguard macroeconomic stability. Public expenditure efficiency benefited from the enactment of a new Budget Code, enhanced results orientation of the budget, and strengthened capital budgeting. A greater share of public expenditures is being covered by improved performance indicators, and the transparency and accountability of public investment are being strengthened.
  The reforms backed by the DPO series have helped Georgia pull itself out of economic crisis and build a foundation for growth in the post-crisis period.

Bank Contribution

The DPO series amounted to US$175 million in total of IDA credits ($165 million) and IBRD loans ($10 million). DPO-1 for the amount of $85 million IDA was approved by the Board in July 2009. DPO-2, including an IDA credit of $40 million and an IBRD loan of $10 million, was approved by the Board in July 2010. DPO-3, amounting to $40 million IDA, was approved by the Board in July 2011.

Partners

The Government of the Netherlands provided cofinancing of €2.5 million for DPO-1 and €2 million for DPO-2. The design and implementation of the DPO program benefitted from close coordination with several partners, including the Netherlands Embassy, the International Monetary Fund, the European Commission, the Asian Development Bank, the U.S. Agency f or International Development, and the United Nations Development Programme, as well as other development partners, nongovernmental organizations, and the private sector.

Moving Forward

The DPO series is expected to close in March 2012. The Government of Georgia has requested that the World Bank support its post-crisis reform agenda to sustain growth and employment generation through a new DPO series. The Bank is also responding to the government’s request for analytical and advisory services to better understand the sources of and prospects for growth and public expenditure efficiency in Georgia.

Beneficiaries

The DPO-supported reforms provided financial and medical aid to thousands of poor and vulnerable Georgians while the economy regained its footing. Grigol Beruchashvili and Medea Darchia are a poor, elderly couple suffering from multiple health problems. The government’s DPO-backed targeted social assistance and medical insurance programs offered critical help. “The voucher prolonged my life. I am alive today only thanks to this voucher,” said Grigol Beruchashvili, who recently had to undergo expensive surgery.

The reforms have also bolstered investor confidence and improved competitiveness by reducing business costs and making it faster and easier to move goods in and out of Georgia. “The Customs people treat us well. I don’t even have to leave the truck. The papers are processed in 5 minutes. Everything is done in an orderly fashion,” said truck driver Otar Mdivnishvili at the newly reconstructed Sarpi Customs checkpoint on the border with Turkey.