Report and Recommendation of the President to the Board of Directors

Project Number: 54191-001 May 2020

Proposed Countercyclical Support Facility Loan Georgia: COVID-19 Active Response and Expenditure Support Program Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB’s Access to Information Policy.

CURRENCY EQUIVALENTS

(as of 12 April 2020)

Currency unit – lari (GEL)

GEL1.00 = $0.3127 $1.00 = GEL3.145

ABBREVIATIONS ADB

CARES – –

Asian Development Bank COVID-19 Active Response and Expenditure Support

COVID-19 CPRO FTA GDP Geostat IACC IMF MEL MEPA MOF MOILHSA NPI PFM PMT SMEs TA TSA WHO

– – – – – – – – – – – – – – – – – –

coronavirus disease COVID-19 Pandemic Response Option free trade agreement Gross domestic product National Statistics Office of Georgia Inter-Agency Coordination Council on COVID-19 International Monetary Fund Monitoring, Evaluation and Learning Ministry of Environmental Protection and Agriculture Ministry of Finance Ministry of Internally Displaced Persons from the Occupied Territories, Labour, Health and Social Affairs nonpharmaceutical intervention public financial management proxy means testing small and medium-sized enterprises technical assistance Targeted Social Assistance World Health Organization

NOTES

(i) The fiscal year (FY) of the Government of Georgia ends on 31 December.

(ii) In this report, “$” refers to United States dollars.

Vice-President Shixin Chen, Operations 1 Director General Werner E. Liepach, Central and West Asia Department (CWRD), Director Tariq H. Niazi, Public Management, Financial Sector, and Trade

Division, (CWPF), CWRD Shane Rosenthal, Georgia Resident Mission, (GRM), CWRD

Team leader Rogerio de Almeida Vieira de Sa, Young Professional, CWPF,

CWRD Team members Eva Fernandez, Trade Specialist, CWPF, CWRD Gladys Franco, Social Development Officer (Gender), Portfolio,

Results, Safeguards and Gender Unit, CWRD (CWOD-PSG), CWRD

George Kiziria, Senior Project Officer (Infrastructure), GRM, CWRD George Luarsabishvili, Economics Officer, GRM, CWRD Kaukab Hassan Naqvi, Senior Economist, Economic Research and

Regional Cooperation Department Oksana Nazmieva, Principal Financial Management Specialist, CWOD-PSG, CWRD Elinor Piano, Project Analyst, CWPF, CWRD Kirthi Ramesh, Social Sector Specialist, CWSS, CWRD Kristian Rosbach, Economist, Regional Cooperation and Operations Coordination Division, CWRD Anna Liza Silverio, Associate Project Analyst, CWTC, CWRD

Mariane Sual, Senior Operations Assistant, CWPF, CWRD Tamar Tsiklauri, Project Analyst, GRM, CWRD Michiel Van der Auwera, Senior Financial Sector Specialist (Social

Security), SDTC-SOC One ADB teama Shinsuke Kawazu, Principal Counsel, Office of the General Counsel Akmal Nartayev, Senior Financial Management Specialist,

Procurement, Portfolio and Financial Management Department, Public Financial Management Division

David Aaron Robinett, Senior Public Management Specialist (State Owned Enterprise Reforms), Sustainable Development and Climate Change Department

Agnes Surry, Senior Planning and Policy Specialist, Operations Planning and Coordination Division, Strategy, Policy and Partnerships Department

a Interdepartmental advisory team

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page

PROGRAM AT A GLANCE

I. THE PROPOSAL 1

II. PROGRAM AND RATIONALE 2

A. Background and Development Constraints 2

B. Proposed Program and ADB’s Value Addition 10

C. Development Financing Needs, Development Partner Coordination and Debt Sustainability 11

D. Implementation Arrangements 14

III. DUE DILIGENCE 14

IV. ASSURANCES 15

V. RECOMMENDATION 15

APPENDIXES

1. Design and Monitoring Framework 16

2. List of Linked Documents 19

3. Development Policy Letter 20

4. Assessment of Compliance with the Access Criteria for the Countercyclical Support Facility and COVID-19 Pandemic Response Option 22

Project Classification Information Status: Complete

PROGRAM AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 14052020112636319745 Generated Date: 20-May-2020 16:43:38 PM

1. Basic Data Project Number: 54191-001Project Name COVID-19 Active Response and

Expenditure Support ProgramDepartment/Division CWRD/CWPF

Country Georgia Executing Agency Ministry of FinanceBorrower Minstry of FinanceCountry Economic Indicators https://www.adb.org/Documents/LinkedD

ocs/?id=54191-001-CEIPortfolio at a Glance https://www.adb.org/Documents/LinkedD

ocs/?id=54191-001-PortAtaGlance

2. Sector Subsector(s) ADB Financing ($ million)Public sector management Public expenditure and fiscal management 61.00

Social protection initiatives 27.00

Health Disease control of communicable disease 6.00

Health system development 6.00

Total 100.00

3. Operational Priorities Climate Change InformationAddressing remaining poverty and reducing inequalities

Accelerating progress in gender equality

Strengthening governance and institutional capacity

Fostering regional cooperation and integration

GHG reductions (tons per annum) 0Climate Change impact on the Project

Low

ADB Financing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Cofinancing

Adaptation ($ million) 0.00

Mitigation ($ million) 0.00

Sustainable Development Goals Gender Equity and MainstreamingSDG 1.3, 1.5, 1.aSDG 3.3, 3.8, 3.dSDG 5.1, 5.aSDG 8.3, 8.5, 8.8SDG 10.4SDG 17.4

Effective gender mainstreaming (EGM)

Poverty TargetingGeneral Intervention on Poverty

4. Risk Categorization: Complex .

5. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

6. Financing

Modality and Sources Amount ($ million)

ADB 100.00 Sovereign COVID19 Pandemic Response Option (Regular Loan): Ordinary capital resources

100.00

Cofinancing 0.00 None 0.00

Counterpart 0.00 None 0.00

Total 100.00

Currency of ADB Financing: Euro

I. THE PROPOSAL 1. I submit for your approval the following report and recommendation on a proposed Countercyclical Support Facility loan to Georgia for the COVID-19 Active Response and Expenditure Support (CARES) Program under the COVID-19 pandemic response option (CPRO).1 2. The Government of Georgia responded to the public health threat posed by coronavirus disease (COVID-19) in a timely and effective manner by introducing a comprehensive package of containment measures. However, while these strict containment efforts have shielded a vulnerable public health system from overburden, they disrupt a trajectory of strong and inclusive economic growth, threatening the development gains achieved in the period between 2012 and 2019. To mitigate the adverse public health and socioeconomic effects of the crisis, the government adopted a sizable countercyclical expenditure program. The proposed CARES Program2 aims to support the government in implementing its response package to protect the lives and livelihoods of Georgians, especially the poor and vulnerable segments of the population, women, and children.

Table 1. Compliance with Access Criteria for CPRO CPRO Access

Criteria ADB Staff Assessment

1. Adverse Impact of Exogenous Shocks

The IMF projects GDP growth in Georgia to decline to -4% in 2020 against the original estimate of 4.3% because of the COVID-19 pandemic, resulting in a $3.6 billion loss in economic output. The economic slowdown, led by a contraction in domestic demand and investment—and a sharp contraction in tourism, foreign direct investment, trade, and remittances—is threatening the development gains Georgia achieved in the period 2011–2019. The number of unemployed people could triple which, in addition to an expected increase in loss of income by people in the informal sector, would significantly threaten the livelihoods of 47% of Georgians who are considered vulnerable to poverty. A protracted crisis is limiting the fiscal space needed to mitigate health and economic impacts. A decline of 23.3% in revenue collection against the original estimate for 2020-led by a reduction of 1.6% in the tax–GDP ratio–combined with increased expenditure under the government’s Anti-Crisis Plan will widen the fiscal deficit to 8.1% against the original estimate of 2.2% of GDP.

2.Countercyclical development expenditures

The government announced a GEL3.5 billion ($1.1 billion) plan, to cover higher spending in the health sector; provide assistance to affected private sector entities; and support the unemployed, poor and vulnerable with a GEL1.035 billion ($329 million)social assistance package. The total expenditure package amounts to 7.4% of GDP, one of the highest in the region. The government has also adopted a range of countercyclical monetary policy measures for price stability and adequate liquidity in the financial system.

3. Pre-shock Record of sound macroeconomic Management

Before the COVID-19 pandemic, Georgia’s economy expanded at an average of 4.7% during 2011–2019 and was expected to grow by 4.3% in 2020. According to ADB and IMF forecasts for 2020, all key macro fiscal aggregates were expected to remain below their maximum target

ceilings, with public debt–GDP a 44.5%, the fiscal deficit at 2.2% and total expenditure as a share of GDP at 28.3%. Reforms to tax administration led to higher-than-anticipated tax revenue collection, reaching 23.7% of GDP in 2019. The only significant risk faced by the authorities before COVID-19 stemmed from inflationary pressures, which the National Bank of Georgia targeted through tightened monetary policy. The banking industry’s performance was also expected to remain robust, with an increase in credit to the private sector, improved asset quality and higher liquidity despite marginally lower profitability. The IMF’s favorable assessment letter confirm ADB staff’s assessment that the economic downturn is because of the COVID-19 pandemic, not because of previous macroeconomic mismanagement.

4. Structural Georgia has made credible commitments to continue its ambitious reform path despite the COVID-19 crisis under IMF and World Bank policy-based operationsb and planned policy reforms

1 Asian Development Bank (ADB). 2020. ADB’s Comprehensive Response to the COVID-19 Pandemic. Manila. 2 The proposed CARES Program was put together in response to the Government of Georgia’s official request for

emergency assistance by ADB submitted on 26 March 2020.

2

CPRO Access Criteria

ADB Staff Assessment

reforms and pandemic response plan

supported by ADB.c In response to the crisis, the government established an IACC under the direction of the Prime Minister in February 2020. The IACC has taken decisive and credible steps to contain the spread of COVID-19 and mitigate the recessionary impact on the economy. The declaration of a national State of Emergency in March 2020 was followed by the publication of an extensive list of containment measures and, on 24 April 2020, the announcement of a comprehensive response package supporting health sector resilience, affected businesses, and the poor and vulnerable during the crisis.

5. Debt sustainability

The public debt–GDP ratio has been stable in recent years, hovering below 45% of GDP. Widening fiscal imbalances because of COVID-19 are expected to push the public debt–GDP ratio to 62.4% in 2020 but will resume a downward trend starting in 2021 towards a 51% ratio by 2024. Despite the sharp increase in 2020, the ADB’s DSAd concludes that public debt remains sustainable in the medium term. Financial assistance from the ADB will not aggravate Georgia’s debt vulnerabilities in the medium term.

6. Coordination with the International Monetary Fund

ADB has consulted with IMF and is in close contact with its relevant staff on macroeconomic monitoring. IMF has provided a favorable assessment letter. The IMF has reached staff-level agreement on augmentation and extension of the current program, helping the government meet shock-related needs, and build buffers.

ADB = Asian Development Bank, COVID-19 = coronavirus disease, CPRO = COVID-19 Pandemic Response Option, GDP = gross domestic product, IAAC = Inter-Agency Council for Coordination, IMF = International Monetary Fund. a IMF. 2020. Georgia: Assessment Letter for the Asian Development Bank. Washington DC. b World Bank. 2020. Economic Management and Competitiveness Development Policy Operation. Washington, DC.

and IMF. 2017. Extended Arrangement Under the Extended Fund Facility for Georgia. Washington, DC. c ADB. 2020. Technical Assistance to Georgia for Preparing the Second Domestic Resource Mobilization Program.

Manila. d ADB. 2020. Georgia Debt Sustainability Analysis. Manila. Source: Asian Development Bank.

II. PROGRAM AND RATIONALE

A. Background and Development Constraints 3. Impact of the COVID-19 pandemic in Georgia. Since its outbreak in December 2019, COVID-19 has spread rapidly across the world. World Health Organization (WHO) declared it a global pandemic on 11 March 2020. The number of cases worldwide soared to 2,912,421 with 203,432 deaths worldwide as of 26 April 2020.3 Georgia, with a population of 3.723 million people,4 began the fight against COVID-19 on 28 January, 1 month before the first confirmed case of infection was reported on 26 February, imported by a citizen returning from Iran via Azerbaijan. A state of emergency was declared on 21 March, 2 days before community transmission was confirmed. As of 19 April 2020, 388 cases had been reported and four deaths confirmed.5 Some 5,094 people are in a 14-day mandatory quarantine, while 547 patients remain under observation in hospitals.6 If no mitigation and containment measures were adopted, it is estimated that 114,804 people could require hospitalization and nearly 29,500 could require intensive care, which would overwhelm the health system. 7 The increasing burden of noncommunicable diseases8 poses an additional risk to the populations’ vulnerability to the COVID-19 pandemic as evidence from other countries suggests. This means that strong

3 John Hopkins University. Coronavirus Resource Center. COVID-19 Dashboard by the Center for Systems Science

and Engineering. (accessed on 24 April 2020). 4 National Statistics Office of Georgia (Geostat). Population and Demography. (accessed 20 April 2020). 5 World Health Organization. Coronavirus disease (COVID-19) situation reports. (accessed 22 April 2020). 6 StopCov.ge. (accessed 20 April 2020). 7 Estimates assume no social distancing measures and a rate of infection of 2.4. P. Walker et al. 2020. The Global

Impact of COVID-19 and Strategies for Mitigation and Suppression. London: Imperial College London. 8 Noncommunicable diseases account for more than 81.2% of the burden of disease in Georgia, and the prevalence

of risk factors such as smoking and hypertension is high.

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prevention measures and further strengthening of the health system’s capacity to handle more cases of COVID-19 in the medium-term are needed. 4. Public health system’s vulnerability to COVID-19. Despite significant improvements in recent years, Georgia’s public health system remains vulnerable to the health burden posed by the COVID-19 pandemic and crisis. According to the Global Health Security Index, Georgia’s health capacity in clinics, hospitals and community care centers scored low: 18.3 out of 100.9 This is in part driven by the country’s low nursing staff and hospital bed density.10 Georgia has only 47.3 nurses per 10,000 population and 26 hospital beds per 10,000 population compared with neighboring countries such as Armenia which has 42 beds per 10,000 population.11 Some 62% of frontline medical doctors, who are higher risk of contagion, are women.12 5. Pre-shock strong economic performance recorded. The outbreak of COVID-19 disrupted a trajectory of strong economic performance and robust macroeconomic fundamentals in Georgia. Before the COVID-19 pandemic, economic performance was expected to remain strong, with gross domestic product (GDP) growth forecasted at 4.3% for 2020 on account of good macroeconomic management. Georgia’s demonstrable commitment to fiscal discipline translated into robust macroeconomic fundamentals between 2014 and 2020. In 2019, Georgia achieved the lowest fiscal deficit in 10 years (at 2.2% of GDP), a historically low current account deficit (at 5.1% of GDP), the lowest unemployment rate since the country’s foundation (at 11.6%), and the lowest rate of poverty (still high at 20.1 percent, but nearly halved in comparison to 2007). Public debt–GDP remained under its 60% ceiling, at 44.5% and expenditure as a share of GDP at 28.3%. Reforms to revenue administration had led to overperformance in revenue collection, reaching 23.7% of GDP in 2019, and helped maintain the government’s strong fiscal position even as it pursued ambitious public investment and social sector spending. 13 As a result, all three main credit rating agencies upgraded Georgia’s sovereign credit rating to BB/Ba2 from BB–/Ba3 referring to improved economic resilience and sound macroeconomic management as the main driver. Monetary policy interventions and exchange rate flexibility were expected to remain effective in curbing inflationary pressures. The banking sector’s performance was expected to remain robust, with an increase in credit to the private sector, improved asset quality and higher liquidity despite marginally lower profitability.14 6. Impact of COVID-19 on the economy. Global travel restrictions, nonpharmaceutical interventions (NPIs), and the anticipation of a global economic crisis because of the COVID-19 pandemic caused an immediate exogenous shock on the Georgian economy through four main transmission channels: (i) a slowdown in tourism, (ii) trade disruptions, (iii) capital outflow, and (iv) an increase in the cost of finance. The tourism sector, which contributed 11.6% to GDP in

9 The Global Health Security index is a comparative assessment of global health security capabilities in 195 countries.

It reflects the average performance across 34 categories, which together indicate the readiness level of public health systems to handle a biological threat. Global Health Security Index. (accessed 26 April 2020).

10 WHO. Global Health Observatory data repository. Medical doctors. (accessed 26 April 2020). 11 WHO. Global Health Observatory data repository. Hospital bed density. (accessed 26 April 2020). 12 Geostat. 2019. Women and men in Georgia. Tbilisi. 13 The Economic Liberty Act, adopted in 2011 and effective since 2014, established numerical upper limits for public

debt (60% of GDP), the budget balance (3% of GDP), and expenditures (30% of GDP). Public debt and budget balance rules have been adhered to since their introduction. The ceiling on expenditure was breached in 2014–2015 but only marginally and this trend has since been reversed.

14 IMF. 2019. Fifth Review under the Extended Arrangement, Requests for Waivers of Nonobservance of Performance Criteria, Modification of Performance Criteria, and an Extension of the Arrangement and Rephasing of Access; Press Release; Staff Report; and Statement by the Executive Director for Georgia. IMF Country Report. No. 19/372. Washington DC.

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2019, 15 was severely hit by travel restrictions and recorded a 58.6% decline in international visitor trips in March 2020, year on year.16 Reduced international trade affects exports and imports.17 Decreased external demand is expected to shrink exports by 25.0% in 2020. Imports will reduce by 29.3% and affect the availability of intermediary goods for manufacturing. Foreign direct investment is expected to decline by 20.8% in 2020, compared with 2019. Remittances are expected to reduce by 15% in 2020 compared with 2019, having contracted by 9.0% in March 2020 compared with March 2019.18 The contagion effects of the global recessionary shock caused by COVID-19 will be significantly compounded by the effect of containment measures and lockdown imposed by the government since the declaration of the state of emergency in March 2020. These are likely to lead to a sharp decline in aggregate domestic demand, 19 which accounted for 65% of GDP in 2019, and are expected to cause cancellation and delays of investments, affecting the business environment and investor confidence. Domestic production will also suffer, because of NPIs and disruptions to global value chains, trade, and investment, thus exacerbating the recessionary economic and social impact of the crisis. Updated estimates by the IMF and the MOF predict the current account deficit to widen to -11.3% of GDP in 2020, from a record low of -5.1% in 2019 and an estimated -4.9% in 2020. Real GDP is expected to contract by 4% in 2020–a sharp downturn from the previous estimate of 4.3% growth. 7. Impact of COVID-19 on public finances. The impact on state finances is expected to be significant. Recent estimates suggest that state revenues will decrease by $452 million in 2020 because of COVID-19. This sharp decline is driven by an expected fall in the tax–GDP ratio from 23.7% to 21.4% due to slowdown in economic activity. In turn, public expenditure will increase to 32.9% of GDP, compared with the original estimate of 28.3% for 2020. Increases in public expenditure, combined with a sharp decline in public revenue as a result of COVID-19, will widen the fiscal deficit, from 2.2% to 8.1% of GDP in 2020. The public debt–GDP ratio will, as a result, rise from 44.5% in 2019 to 62.4% in 2020 to help meet the estimated financing gap of $1.533 billion that will emerge as a result of COVID-19, its impact on the economy and the cost of the government response. Deteriorating external balances are already resulting in increased pressure on exchange rates and higher yield spreads with US Treasury bonds, making access to international financing more expensive.20 8. Impact of COVID-19 on unemployment, poverty, and gender equality. Under a worst case scenario and without public intervention to avoid mass retrenchment, unemployment could almost triple,21 from 11.6% in 2019 to 31.5% in 2020.22 Restrictions on economic activity across

15 Direct contribution to GDP. World Travel and Tourism Council. WTTC Data Gateway. (accessed 10 May 2020) 16 Georgian National Tourism Administration. International Travel (Residence). 2020. (accessed 22 April 2020). The

tourism sector and inbound tourism expenditure stood at the equivalent of 21.7% of GDP in 2018 according to the United National World Tourism Organization e–data base (accessed on 22 April 2020).

17 IMF. 2020. World Economic Outlook: The Great Lockdown. Washington, DC. 18 National Bank of Georgia. Money Transfers Mapper. Tbilisi. (accessed 22 April 2020). 19 Spending in transportation, clothing, electronics, and domestic services is projected to decline significantly. Y.

Babych, D. Keshelava, and G. Mzhavanadze. 2020. The Economic Response to COVID-19: How is Georgia Handling the Crisis?. Tbilisi: The International School of Economics at TSU Policy Institute.

20 Official monthly exchange rates registered by the National Bank of Georgia suggest a depreciation of the Lari by 11.2% between February 2020 and April 2020. National Bank of Georgia. Official Exchange Rate of Lari Against Foreign Currencies. (accessed 7 May 2020).

21 The most affected sectors are manufacturing, construction, wholesale and retail trade, and accommodation and food services. Y. Babych, D. Keshelava, and G. Mzhavanadze. 2020. The Economic Response to COVID-19: How is Georgia Handling the Crisis?. Tbilisi: The International School of Economics at TSU Policy Institute.

22 Recent estimates suggest that 22.5% of Georgia’s formal workforce is at high risk of job loss as a result of COVID-19. Some 29.9% of hired workers and 14.0% of self-employed workers are at high risk of job loss (totaling 381,548 jobs). Y. Babych, D. Keshelava, and G. Mzhavanadze. 2020. The Economic Response to COVID-19: How is Georgia Handling the Challenge? Tbilisi: International School of Economics at TSU Policy Institute.

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almost all industries place hundreds of thousands of people at risk, either by downward adjustments to income or working hours, or by losing their jobs. A total of 381,548 workers, or 23% of all hired and self-employed workers, are at high risk of job loss as a result of the COVID-19 crisis.23 Such sharp increases in unemployment could eradicate years of inclusive economic growth, reversing a decade-long decline in absolute poverty.24 While absolute poverty ($1.90/day) has declined sharply from 12.2% in 2010 to 3.7% estimated for 2020, the effects of COVID-19 are expected to lead to a rise in poverty incidence to 4.3%, in a best case scenario, or 6.8%, in a worst case scenario.25 Further, the national poverty line indicates that one in five Georgians (20.1% in 2018) still lives in poverty. As of 2018, 47% of Georgians were estimated to remain vulnerable to poverty, with monthly incomes precariously close to the national poverty line.26 High dependence on labor income implies that even a small increase in the unemployment rate could push many households into poverty, starting with already vulnerable households.27 The loss of labor income, combined with a reduction in remittances, will have a direct bearing on domestic consumption and further threaten employment and incomes. The 23% of Georgians who depend on income from informal labor for their livelihoods28 are also expected to suffer from the impact of COVID-19. 9. The economic impact of COVID-19 is also expected to contribute to gender economic imbalances. As of December 2019, Georgia had 1.66 million hired and self-employed workers, 46% of which were women.29 Recent estimates suggest that 40.6% of all female hired workers and 22.6% of female self-employed workers are at high risk of job loss.30 With women earning only 64% of men’s average earnings in 2017, potential downward adjustments to income or work hours would likely affect women more severely.31 Further, women comprise an estimated 60% of all workers in tourism, one of the most affected industries in Georgia, which accounts for 7.8% of total employment. The low average salaries for women in tourism, which were about a third of the national average salaries in 2017, exacerbate the impact of a reduction in income in this industry on women (footnote 31). 32 Finally, the expected 15% reduction in remittances is likely to impact women disproportionately, as they represent 61.8% of all remittance recipients in Georgia.33 10. Immediate and effective response to contain the spread of COVID-19. Acknowledging the fragility of its public health system and the difficulties in handling the COVID-19 pandemic, Georgia implemented strict containment measures very early. On 21 March 2020, with 47 confirmed cases of COVID-19, Georgia declared a state of emergency and published a comprehensive list of NPIs, including restrictions on the movement of people, public gatherings, cultural and sports events, as well as restrictions on the types of economic activities that are

23 L. Pavlenishvili. 2020. The Social Impacts of COVID-19—Case for a Universal Support Scheme? Tbilisi: International

School of Economics at TSU Policy Institute. 24 The share of the population under the national poverty line has decreased from 37.3% in 2010 to 20.1% in 2018.

Geostat. Living Conditions. (accessed 14 April 2020). 25 ADB. 2020. COVID-19 and Poverty: Some Scenarios Based on Grouped Distribution Data on Household

Consumption. Manila. 26 Vulnerability is defined as having a probability greater than 10% of falling into poverty. World Bank. 2020. Georgia

COVID 19 Emergency Response. Washington, DC. 27 An estimated 40% of those whose incomes are estimated to be only marginally above the poverty threshold depend

on labor income (wages). 28 Informal employment does not show significant discrepancy in the share of women and men. 29 Geostat: Employment and Unemployment. (accessed 29 March 2020). 30 L. Pavlenishvili. 2020. The Social Impacts of COVID-19—Case for a Universal Support Scheme? Tbilisi: International

School of Economics at TSU Policy Institute. 31 Geostat. Wages. (accessed 9 April 2020). 32 The average salary in Georgia for 2017 was GEL1,069. Women’s average salary in tourism was GEL369. 33 Global Migration Group. 2017. Migration, Remittances and Financial Inclusion: Challenges and Opportunities for

Women’s Economic Empowerment. New York: UN Women.

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allowed to continue operating.34 While these measures have been largely successful in slowing the pace of infection in Georgia, they cause significant socioeconomic costs, affecting the poor and vulnerable disproportionately.

11. Government’s Anti-Crisis Plan. To mitigate the expected socioeconomic impacts of COVID-19, the government adopted a comprehensive countercyclical development expenditure program. Costed at GEL3.5 billion ($1.1 billion), or 7.4% of GDP, the response program has a threefold objective: (i) increase the public health sector’s capacity to respond to the pandemic in the short and medium term; (ii) minimize losses to be incurred by affected private sector entities; and (iii) limit socioeconomic costs on the poor and vulnerable through expanded assistance programs. The government’s countercyclical expenditure program has been drafted within a demonstrably sustainable macroeconomic background and will be implemented through a prudent budgetary framework (footnote 15). 12. Public health sector response to COVID-19 (GEL350 million or $111 million). The health system’s capacity to cope with an increasing number of COVID-19 cases is limited. While the strict containment measures adopted by the government have been widely effective in minimizing the number of cumulative cases, the government acknowledges the need to strengthen the health system’s capacity in the medium-term. The health sector response revolves around five key areas of intervention:

i) Case detection and confirmation: The government will procure necessary medical hygiene materials, COVID-19 test kits, laboratory reagents, polymerase chain reaction equipment, and specimen transport kits. It will be supported by investment in information technology systems for disease surveillance and contract tracing.35

ii) Isolation of high-risk individuals: The government will ensure that high risk individuals36 are placed in specially organized quarantine facilities.

iii) Improving the quality of medical care: To improve the quality of medical care provided and minimize risks of infection to health personnel, the government will train at least 2,000 medical staff, procure essential medical goods and carry out rapid conditioning of designated public health facilities.

iv) Patient care and case management: The government has committed to providing free access to all diagnostic, laboratory and treatment costs of COVID-19 patients in public and private facilities.37

v) Infrastructure investment: Government is investing in capacity improvements of designated public facilities, including hospitals that serve a large internally displaced people (IDP).

13. Support to affected businesses (GEL2.11 billion or $671 million). The government has committed a GEL2.11 billion ($671 million) to support most affected businesses, with a focus on small and medium-sized enterprises (SMEs). This support is expected to contain mass layoffs and, therefore, alleviate the socioeconomic severity of the crisis. It will also facilitate recovery

34 Government of Georgia. 2020. Ordinance 181: On the Approval of Measures to be Implemented in connection with

the Spread of the Novel Coronavirus (COVID19) in Georgia. Tbilisi. 35 Ministry of Internationally Displaced Persons from the Occupied Territories, Labour, Health and Social Affairs

(MOILHSA). 2020. Innovative STOP COVID App Aimed at Early Detection and Prevention of COVID-19 Created at the Ministry. News release. 16 April.

36 This includes individuals with international travel history or with suspected contacts. 37 Government is fully financing COVID-19 related treatment costs, provision of equipment, drugs and medical supplies.

Government is also providing support case management for non-severe cases in non-medical settings.

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once containment measures are lifted. The government has tailored its support package to benefit SMEs and firms in the agriculture sector. 14. Support to small and medium-sized enterprises. According to Enterprise Georgia,38 an estimated 99.7% of all registered firms in Georgia in 2017 were SMEs, which employed 62% of all formal workers and 67% of all female hired workers. 39 To avoid mass retrenchment of workers, the government adopted three measures aimed specifically at improving access to finance to SMEs: (i) increasing the budgetary allocation to the Credit Guarantee Scheme by GEL300 million($111 million) to raise the total value of co-financed loans to SMEs to GEL2 billion ($636 million); (ii) expanding and upgrading existing credit enhancement mechanisms under the “Produce in Georgia” program, 40 which is expected to benefit at least 300 SMEs; and (iii) extending GEL40 million ($12.7 million) in grants to micro-entrepreneurs,41 which is expected to benefit up to 5,000 entrepreneurs. In addition to these multi-sectoral measures, the government will provide tax credits to SMEs in the tourism industry—one of the most affected segments, where 60% of workers are women, many of whom at high risk of job loss. This includes the deferral of property and income tax until November 2020, which is expected to benefit up to 4,500 SMEs, the provision of an 80% subsidy on interest rate payments for small and medium-sized hotels42 for a period of 6 months, which is expected to benefit up to 2,000 small and medium-sized hotels. 15. Support to firms in the agriculture sector. Despite its relatively low contribution to GDP (7% in 2019), 40.9%43 of all active working age persons in Georgia work in agriculture—97% of whom are self-employed and fall outside existing support systems. 44 Further, low baseline incomes in the sector suggest that loss of economic activity could have a disproportionately higher impact on the rise in poverty incidence compared with other sectors. As a result, measures to support firms in the agriculture sector are expected to be effective in mitigating the resurgence in poverty incidence. They also complement the government’s efforts to increase domestic food production, with a view to protecting food insecure households.45 To this end, the government adopted a measure ensuring the provision of a 100% subsidy for interest payments on loans obtained through the government’s agrocredit project. This measure will benefit up to 5,000 firms in the sector, most of which are expected to be SMEs. In addition to this, government will exempt agriculture sector firms from paying amelioration fees and will write off any accumulated arrears on such fees. This measure is expected to benefit up to 40,000 small-holder farmers and contribute toward increasing domestic food production. 16. Provision of ample liquidity to all firms. The National Bank of Georgia has adopted a range of countercyclical measures that will ensure the provision of liquidity to the real economy. Implementation of additional capital requirements planned for March 2020 were postponed and commercial banks are now allowed to use capital conversion, countercyclical, and related buffers.

38 Enterprise Georgia is an agency of the Ministry of Economy and Development responsible for business support,

export promotion and investment in Georgia sectors. It contains a comprehensive registry of all SMEs. 39 Organisation for Economic Co-operation and Development. 2019. Monitoring Georgia’s SME Development Strategy

2016–2020. Paris. 40 Changes made to the terms of the “Produce in Georgia” program include: (i) increasing period of cofinancing of

loans/leasing from 24 months to 36 months; (ii) changing the mechanism of interest cofinancing; (iii) more types of activities; (iv) lowering the minimum threshold for loans/leasing; (v) increasing funding for working capital.

41 Maximum size of a single grant is set at GEL30,000. 42 Hotels with up to 50 rooms. 43 Geostat. Labour Force Survey. Tbilisi (accessed 10 April 2020). 44 Ministry of Economy and Sustainable Development. 2017. Labour Market Analysis of Georgia. Tbilisi. 45 An estimated 1.3 million Georgians (roughly 35% of the population) are either moderately or severely food insecure.

FAO. 2019. The State of Food Security and Nutrition in the World: Safeguarding against economic slowdowns and downturns. Rome.

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Countercyclical capital buffers 46 currently stand at GEL4 billion ($1.27 million) and can be gradually released according to demand. The central bank stands ready to ease credit regulations and remove restrictions on lending. It has decreased liquidity coverage ratio limits as well as mandatory foreign exchange reserve requirements. Furthermore, criteria for security or pledging of repurchase agreements to support local currency liquidity have been updated. Altogether, these measures are expected to free up additional resources of around GEL1.6 billion ($500 million). 17. Social Assistance Package (GEL1.035 billion or $329 million). The government has committed to reducing the negative effects of job and income loss, increasing its support to the poor and vulnerable.47 To this end, it has adopted a range of measures that attempt to preserve jobs and support the livelihoods of people who lose their source of income as a result of the COVID-19 crisis. 18. Employment preservation measures. To avoid mass layoffs in the formal sector, the government will exempt businesses from income tax charged over GEL750 ($238) of income for workers with incomes up to GEL1,500 ($477) for 6 months, provided these worker’s jobs are retained. Up to 300,000 employees are estimated to be covered by this assistance measure. Workers who lose their jobs or who are put on unpaid leave will receive temporary unemployment assistance equivalent to GEL200 per month ($63.5) for up to six months. For informal workers, 50% of whom are estimated to be women,48 and self-employed workers who lose their source of income, the government will provide access to a one-time benefit of GEL300. An estimated 250,000 workers are expected to benefit from this scheme. The State Employment Support Agency in the Ministry of Internally Displaced People from the Occupied Territories, Labour, Health and Social Affairs (MOILHSA) will verify eligibility, avoiding overlaps with the other emergency programs.

19. Cash transfers to vulnerable groups. The government has adopted a wide range of temporary social protection cash transfer measures to alleviate the impact of the crisis on the poor and vulnerable, especially women and people living with disabilities. The Targeted Social Assistance (TSA) delivery system provides a solid basis to address the temporary shock, with a social registry (accounting for 30% of the total population) that can facilitate a rapid expansion. Application and registration procedures have been temporarily simplified to facilitate access to the TSA. The threshold has been temporarily expanded from 65,000 to 100,000 (proxy-means test score), with 70,000 households (190,000 citizens) expected to be eligible for GEL600 ($191) on average in the next 6 months. Households with three or more children under the age of 16, are entitled to a top-up benefit of GEL100 per household for 6 months. Household with persons with severe disabilities and disabled children are entitled to an additional GEL200 ($63.5) for 6 months. In addition to the expansion of the TSA system, government will also provide a cash transfer of GEL600 ($191) for adults living with acute disabilities and children living with any type of disability over 6 months. As many as 41,500 people are expected to benefit from this scheme. In addition to cash transfers to the vulnerable and poor, government will also ensure that the basic

46 The Basel III countercyclical capital buffer is calculated as the weighted average of the buffers in effect in the

jurisdictions to which banks have a credit exposure. 47 A total of 381,548 jobs—257,365 employees and 124,183 self-employed—are at high risk of job loss because of the

COVID-19 crisis. In addition, 23% of the population, or 45% of the total work force, is in the informal sector and at high risk of loss of income. Most of the self-employed work in agriculture. While this sector is expected to be only moderately affected, the impact on the self-employed will still be substantial, given their low earnings, putting them at risk of falling into poverty. L. Pavlenishvili. 2020. The Social Impacts of COVID-19 ISET. 2020. The Social Impacts of COVID-19—Case for a Universal Support Scheme? Tbilisi: International School of economics at TSU Policy Institute.

48 UN Women. 2020. Analysis of the Gender Pay Gap and Gender Inequality in the Labor Market in Georgia. New York.

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needs of Georgians are met. To this end, government will subsidize utility fees for three months (March, April, May) for electricity and gas, and water bills for households that consume less than 200 kWh of electricity and 200 cubic meters of natural gas per month. 20. Ensuring food security. Georgia is a net food importer49 and highly import-dependent for most food categories.50 This puts food security at risk through food export restrictions. Food prices had already risen before the COVID-19 pandemic, reaching 13.4% year on year in March 2020 compared with 6.1% headline inflation, because of exchange rate depreciation.51 The average share of food consumption expenditure was 43% in 2018, which underlines the social importance of food prices. The Ministry of Environmental Protection and Agriculture (MEPA) has adopted a range of measures to ensure food security and spur domestic production.52 These include: (i) ensuring prices for basic foodstuffs;53 (ii) providing crop loans;54 (iii) increasing the maximum government contribution to finance fixed agricultural assets from 8% to 11%; (iv) subsidizing interest rates of up to 10% for food industry;55 (v) securing collateral of up to 50% for livestock working capital loans; (vi) supporting smallholder milk production with GEL3 million ($0.95 million); 56 (vii) subsidizing wheat imports with GEL5.2 million ($1.65 million); (viii) expanding the Agriculture Insurance Program by GEL9 million ($2.86 million);57 and (ix) renewing the Agricultural Support Program with GEL10 million ($3.18 million).58 The government will focus on SMEs in the agriculture sector, relying on the registry of support schemes to identify beneficiaries. In addition, MEPA, together with the European Union, and the Food and Agriculture Organization of the United Nations, awarded 50 matching grants for a total amount of GEL2.2 million ($0.7 million) to support food production and security.59 21. Pro-poor and gender-responsive response program. Georgia’s Anti-Crisis Plan effectively addresses the needs of the poor and vulnerable including women, children and people living with disabilities. By increasing health spending, the MOILHSA will help protect all frontline medical workers from contagion, 62% of whom are women. By ensuring that all COVID-19 related diagnosis and treatment are provided free of charge, the government is also safeguarding the poorest from a potential increase in out-of-pocket expenditure on health. This is likely to benefit women-headed households, which spent, an average of 1% more on health care than men-headed households in 2016.60 Under its private sector support package, the government will protect all the 40% of Georgians living near the poverty line, who rely on labor income for their

49 A. Simoes and C. Hidalgo. 2020. The Economic Complexity Observatory: An Analytical Tool for Understanding the

Dynamics of Economic Development. Scalable Integration of Analytics and Visualization: Papers from the 2011 AAAI Workshop, WS-11-17. Palo Alto: Association for the Advancement of Artificial Intelligence. Michigan.

50 P. Mamardashvili et al. 2020. How Does Covid-19 Affect the Food Supply Chain in Georgia? Tbilisi: International School of Economics at TSU Policy Institute.

51 Based on Geostat 2018 data, Georgia has a self-sufficiency ratio (domestic production/imports) in wheat of 15%, maize 71%, potatoes 102%, vegetables 59%, meat 52%, milk and milk products 81%, and eggs 99%. Geostat. Food Security. (accessed 26 April 2020).

52 MEPA. 2020. The Ministry of Environmental Protection and Agriculture of Georgia is Taking Complex Measures to Reduce Economic Damage in the Agricultural Production. News release. 24 April.

53 Food categories covered are rice, pasta, buckwheat, vegetable oil, sugar, wheat, wheat flour, milk powder, and beans. P. Mamardashvili et al. 2020. How Does COVID-19 Affect the Food Supply Chain in Georgia? Tbilisi: International School of Economics at TSU Policy Institute.

54 The government will fully finance the interest rate for 6 months. 55 The subcomponent will finance up to GEL25 million. 56 The program will benefit 60 dairy farmers and is financed by the International Fund for Agricultural Development. 57 The agricultural insurance program was put into force on September 1, 2014 and is meant to develop the insurance

market in the agricultural sector, promote agricultural activities, retain income for individuals who are employed in the agricultural sector and reduce risks associated therein.

58 For access to agricultural machinery and the promotion of agricultural production in greenhouses. 59 These grants will allow farmers, cooperatives and SMEs to invest in equipment and installations. 60 Geostat. 2017. Women and Men in Georgia. Tbilisi.

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livelihoods, by containing mass layoffs. Targeted support to firms in the tourism industry is particularly important to safeguard the economic well-being of Georgian women, who constitute 60% of hired workers in the sector. Support to SMEs is also of critical importance to safeguard progress made in the economic empowerment of women in recent years. As of 2018, 67% of all women employed in the private sector worked for SMEs, and 33% of them are now owned or managed by women (paragraph 14).61 The government’s social assistance package has been tailored to mitigate the adverse effects of the COVID-19 crisis on the poor and vulnerable. The temporary unemployment subsidy put in place will help newly laid-off Georgians to sustain their livelihoods until they are able to seek employment opportunities (paragraph 18). This will help mitigate resurgence in poverty incidence as a result of frictional unemployment. The package also includes increases in the coverage of the TSA, of which 55% of beneficiaries are women. This will ensure that individuals who fall into poverty because of COVID-19 are provided adequate financial support to meet their basic needs (paragraph 19). Finally, the government’s Anti-Crisis Plan also includes measures to assist large families as well as people living with acute disabilities. 22. Structural Reforms. Georgia’s response to COVID-19 follows a two-pronged approach: an initial temporary emergency relief package and the continuation of critical structural reforms to ensure the adequacy of its social welfare and public health systems within a sustainable macro-fiscal framework. As an immediate response to the COVID-19 crisis, the government established the IACC under the direction of the Prime Minister in February 2020. The IACC has taken decisive and credible steps to contain the spread of COVID-19 and mitigate the recessionary impact on the economy. The declaration of a national State of Emergency in March 2020 was followed by the publication of an extensive list of containment measures and, in April 2020, the announcement of a comprehensive response package supporting health sector resilience, affected businesses, and the poor and vulnerable during the crisis. In the medium term, the government is committed to pursuing a comprehensive fiscal management and social protection reform program with ADB to strengthen inclusive economic growth in the long run within macroprudential limits. This forms part of the government’s recovery program. In addition to these reforms, the government remains committed to (i) structural policy reform in public sector management to ensure the fiscal sustainability of government operations in the medium term; (ii) capital market reforms to support the de-dollarization of the financial sector and reduce external vulnerabilities; (iii) reforms to the education system to improve job matching, productivity, and wages; (iv) operationalizing pension reforms;62 (v) continuing business environment reforms, e.g., requiring corporations to publish audited financial statements based on International Financial Reporting Standards (IFRS); (vi) developing land cadasters to help protect property rights and simplify land transactions; and (vii) reforms to benefit from Georgia’s free trade agreements (FTAs).63 B. Proposed Program and ADB’s Value Addition 23. The proposed CARES Program will be a critical component of the government’s efforts to mitigate the adverse impact of COVID-19 on the health and welfare of Georgians. It is aligned with the following overarching development objective of the Anti-Crisis Plan: health and economic impacts of COVID-19 in Georgia are mitigated, protecting the most vulnerable. The program will have the following effect: rate of spread of the disease managed, burden on affected businesses mitigated and poverty contained. The program is structured around three output areas:

61 ADB staff calculations based on Geostat Gender. (accessed 30 April 2020). 62 The Asian Development Bank plays an active role in this reform through the provision of technical assistance support

under the Second Domestic Resource Mobilization Program. ADB. 2018. Second Domestic Resource Mobilization: Technical Assistance Paper. Manila.

63 FTAs were signed with the United Kingdom and feasibility studies for expanded or new FTAs with India, Turkey, Gulf states, and Israel are under preparation.

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(i) measures taken to combat the spread of COVID-19 and health sector response capacity strengthened; (ii) affected businesses are assisted; and (iii) enhanced livelihoods support for the most vulnerable segments of the population. 24. ADB’s value addition. ADB has been a trusted partner of Georgia in emergency response, public sector management reform, social protection and infrastructure development. The proposed program builds on more than a decade of close cooperation across key policy reform areas such as fiscal management and social protection, which will be critical elements of the government’s post-pandemic recovery response. Starting in 2014, ADB has been continuously engaged in policy dialogue with the government regarding fiscal management and social protection reform. 64 Under the Second Domestic Resource Mobilization Program,65 ADB is strengthening public sector management and fiscal responsibility while supporting government efforts to reform its public pension system—the largest social protection program in the country. To this end, ADB is strengthening the capacity of key government institutions through a carefully designed capacity building plan under technical assistance (TA) for the Second Domestic Resource Mobilization Program. It is also processing a policy-based loan with a focus on reforms in fiscal management and social protection. Underpinning the CARES Program, ADB is providing grant support to procure medical supplies and equipment, capacity building for the COVID-19 health response and a platform to share and learn from the response of other countries in the region, funded under the regional technical assistance project Regional Support to Address the Outbreak of Coronavirus Disease.66 In addition to the strong base of country knowledge, the CARES Program is also informed by lessons learnt through previous policy-based program support provided to Georgia. Experience through this program provided useful lessons, especially the importance of a clear but realistic DMF, with measurable targets and provision of adequate monitoring support to the government. The Program has drafted the DMF in close coordination with government and has also set up a Monitoring, Evaluation and Learning (MEL) team to ensure tight feedback loops and enhance ADB’s capacity to support the government in overcoming emerging challenges throughout the implementation period. 25. Alignment with Strategy 2030. The Program is fully aligned with ADB’s Strategy 2030, specifically the operational priorities on addressing poverty and reducing inequality (through its support for social programs that will mitigate the expected increase in poverty incidence), accelerating progress in gender equality (through its gender sensitive targets), and strengthening governance and institutional capacity (through support for strengthening the public health sector and social welfare system), and fostering regional cooperation and integration (through complementarities with the regional TA being provided to help inform health responses based on experience from other countries in the region).67 C. Development Financing Needs, Development Partner Coordination and Debt Sustainability

26. Development financing needs for 2020. Overall, according to the latest estimates of the MOF and IMF, the fiscal financing gap is expected to reach $1.533 billion–$1.272 billion more than the original estimate of $261 million before COVID-19. This sharp increase in gross financing

64 ADB. 2014. Report and Recommendation of the President to the Board of Directors: Proposed Programmatic

Approach and Policy-Based Loans for Subprogram 1 to Georgia: for the Improving Domestic Resource Mobilization for Inclusive Growth Program. Manila.

65 ADB. 2018. Preparing the Second Domestic Resource Mobilization Program: Technical Assistance Report. Manila. 66 ADB. 2020. Regional Support to Address the Outbreak of Coronavirus Disease 2019 and Potential Outbreaks of

Other Communicable Diseases: Technical Assistance Report. Manila. 67 ADB. 2018. Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific.

Manila.

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requirements is led by temporary expenditures under the Anti-Crisis Plan and a fall in tax revenues from 23% to 21.4% of GDP. The proposed CARES Program provides for about 6.5% of gross financing requirements for 2020. The remaining gap will be addressed by loans and grants from development partners as well as domestic borrowing, with government deposits available to weather against downside risks, if necessary. The IMF, World Bank, the Asian Infrastructure Investment Bank and selected bilateral partners have committed to assist Georgia in accessing finance (Table 2). Total ADB budget support in 2020 will tentatively amount to $630 million, or 41% of gross financing requirements. This support will help finance Georgia’s countercyclical economic response efforts. Given the rise in the yield spreads to US Treasury bonds in international markets, Georgia aims to reduce its reliance on international capital markets to the extent possible. It will also avoid drawing on its international gross reserves, which it has accumulated over recent years and amount to $3.5 billion.

Table 2: Financing Need and Tentative Budget Support by Development Partners 2020

($ millions) Item 2020 pre-

COVID-19 2020

COVID-19 adjusted

Thematic Focus

Gross financing requirement 261 1,533a Gross foreign financing 234 1,150 ADB 280b CARES Program (CPRO) 100 Fiscal Management and Social Protection PBL TBDc

Modern Skills for Better Jobs (SDP)d 50

Sustainable Water Sanitation Services (SDP)d 50

State Electro System Corporatization (SDP)d 80

AIIB 100 Joint DPO World Bank

European Union 95 Rural development, Education

France (AFD) 205 Social Protection

Germany (KfW) 100 Energy policy

IMF 200 Extended Fund Facility World Bank 180 Health, Education, Emergency Response

ADB = Asian Development Bank, AIIB = Asian Infrastructure Investment Bank, AFD = Agence Française de Développement, CARES = COVID-19 Active Response and Expenditure Support, CPRO = COVID-19 Pandemic Response Option, DPO = development policy operation, EU = European Union, IMF = International Monetary Fund, KfW = Kreditanstalt für Wiederaufbau, PBL = policy-based loan, SDP = sector development program. a Subject to revision. b Amount to be confirmed. c Subject to availability of resources and co-financing. d Policy-based component only (budget support). Source: Government of Georgia, Ministry of Finance.

27. The government has requested a regular loan of €92,302,000 ($100,000,000 equivalent) from ADB’s ordinary capital resources to provide countercyclical budgetary support for Anti-Crisis Plan. The loan will have a 10-year term, including a grace period of 3 years; an annual interest rate determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; a commitment charge of 0.15% per year; and such other terms and conditions set forth in the draft loan agreement. Based on the straight-line method, the average maturity is 6.75 years and there is no maturity premium payable to ADB. 28. Development Partner Coordination. The government is actively coordinating health, social, and economic responses with development partners to overcome the pandemic with decisive policy measures. Since February 2020, it has conducted regular IACC meetings on COVID-19 related issues, chaired by the Prime Minister. The IACC is actively cooperating with

13

the WHO on preparedness and response measures to keep the situation under control. In preparing the proposed CARES Program, the ADB team has consulted and coordinated closely with the IMF on Georgia’s macroeconomic situation, and with other multilateral and bilateral development partners on potential financial support packages aimed at mitigating the negative impact caused by COVID-19. The thematic focus of each development partner’s budget support programs is described in Table 2. The proposed program provides critical support to the government and complements other stakeholders’ responses. As economic impact of COVID-19 becomes clearer, ADB will consider providing further support to the government and explore co-financing opportunities. ADB has also begun liaising with relevant development partners involved in social protection to coordinate future assistance. These include the Agence Française de Développement and the World Bank. ADB will also remain involved in fiscal management reform areas, working closely with the IMF to monitor the macroeconomic situation. 29. Coordination with the IMF. In December 2019, the IMF and the government agreed to an extension of the Extended Fund Facility until April 2021 (footnote 14). The IMF will supervise the compliance with performance criteria and structural benchmarks that help sustain medium-term macroeconomic stability. ADB has consistently liaised with the IMF as part of its engagement in public financial management (PFM) in Georgia, under the Second Domestic Resource Mobilization Program and associated technical assistance project (footnote 65). Recently, coordination with the IMF and other development partners has strengthened to converge around a coordinated response to the COVID-19 crisis. The IMF welcomes ADB’s financial support to Georgia, which will help prevent the accumulation of more onerous financing. The assessment letter from the IMF68 and the debt sustainability assessment from ADB69 confirm that the proposed Program would not worsen the country’s debt sustainability situation. Coordination with the IMF and other development partners on the long-term implementation of macroeconomic and financial reforms is ensured regionally through activities of the Central Asia Regional Economic Cooperation program, whose economic and financial stability cluster holds regular high-level dialogues on macroeconomic policy design and management.70 30. Debt is sustainable in the medium term. Public debt–GDP in Georgia has remained stable between 2014–2019, consistently below 45%. Although it is expected to rise sharply from 42.7% of GDP in 2019 to 62.4% in 2020, ADB expects it to remain sustainable over the medium term. The increase in 2020 is largely because of the fiscal stimulus package to mitigate the impact of COVID-19 compounded by a decline of 23.3% in revenue collection against the original estimate for 2020. The resulting gross financing requirement will be closed primarily through loans and grants from development partners and domestic borrowing to accommodate a higher level of fiscal deficit to mitigate further downside risks to economic and social development. From 2021 onwards, the public debt–GDP ratio is projected to decline as one-off spending measures wane and economic growth recovers. It is expected to reach 50.8% of GDP by 2025. Financial assistance from ADB will not aggravate Georgia’s debt vulnerabilities and fiscal risks in the medium term. While providing critical countercyclical support to the economy, the proposed ADB budget support loans in 2020 represent just 8.3% of Georgia’s public debt stock of nearly $7.6 billion. Additional loans approved or under proposal by other development partners would jointly add another 11.6% to the public debt stock. Together, lending from all these institutions would lift public debt initially to 72% of GDP in 2020, and to 58% of GDP by 2024. These loans, on broadly concessional terms, will not add significantly to the government’s annual debt service obligations.

68 International Monetary Fund Assessment Letter (accessible from the list of linked documents in Appendix 2). 69 ADB debt sustainability analysis (accessible from the list of linked documents in Appendix 2). 70 Central Asia Regional Economic Cooperation Program. Economic and Financial Stability.

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D. Implementation Arrangements 31. The Ministry of Finance will be the executing agency for the Program. The government and ADB have agreed on the design and monitoring framework to support effective implementation of Georgia’s COVID-19 response plan. ADB has committed to establishing a Monitoring, Evaluation and Learning Lab, which will work closely with MOF and other relevant government agencies responsible for the implementation of the program, and support with monitoring and reporting to ADB. The MEL Lab will liaise with the IACC and optimize feedback loops throughout the implementation process to allow for timely learning and adaptive management to the implementing agencies. ADB, through the MOF and the MEL Lab, has committed to mobilizing TA resources to help the government respond to any emerging challenges in a flexible and agile manner. Ongoing TA project on fiscal management reforms will ensure policy dialogue with government on the evolution of the macroeconomic situation (footnote 69). ADB’s regional TA support to the health sector will help contribute to capacity building and sharing of regional experiences and lessons (footnote 66). The MOF will monitor budget execution and flow of funds for countercyclical measures. The proceeds of the loan will be disbursed in accordance with ADB’s Loan Disbursement Handbook (2017, as amended from time to time). The program implementation period is June 2020 to June 2021.

III. DUE DILIGENCE 32. Governance. PFM systems have improved significantly in Georgia with the implementation of the PFM reform action plan—minimizing the risks associated with poor financial management of this CPRO. According to the most recent Public Expenditure and Financial Accountability Assessment (2018) Georgia has sound systems in place for strategic budget planning, execution and accounting and reporting.71 Notable improvements in fiscal discipline are reflected in a reduction of variance of expenditure outturn when compared with the budget (decreased use of virements) and robust execution rates for revenue and stronger oversight of aggregate fiscal risk from state-owned enterprises and public-private partnerships. Georgia has improved its strategic allocation of resources through its multi-year budgeting tool and preparation of costed sector strategies. Finally, Georgia has witnessed an increase in the efficiency of the use of resources for service delivery, with increased effectiveness of payroll controls; internal audit; timelier and more regular reconciliation of accounts; and expansion of the scope and nature of follow-up audits. 33. Poverty and Gender. Despite substantial gains, households in Georgia remain highly vulnerable to shocks, including those associated with the outbreak of COVID-19. Georgia’s current social welfare system covers a relatively high share of the population but may not be sufficient to address the needs of its poorest citizens. While 24% of Georgians are beneficiaries of at least one social assistance program—with women constituting 64.9% of all recipients—only 11.7% of Georgians receive a subsistence allowance under the TSA, against 20.1% of people living under the national poverty line. Nevertheless, the high share of women beneficiaries of both the TSA (55%) and the pension fund (71%) suggest that women receive wider coverage from social welfare programs than men. As of 2018, the share of women living under the relative poverty line in Georgia (20.5%) was only marginally lower than that of men (20.6%). Most of the 61,000 women who received social benefits from government were aged 18–59 years (footnote 12). Of the 61,000 women who received social benefits, 81% received disability pension, while 18% received survivors’ pension, and 1% received state compensation. The proposed program

71 PEFA Secretariat. 2018. Georgia: Public Expenditure and Financial Accountability (PEFA) Assessment 2017.

Washington DC: World Bank.

15

is categorized as effective gender mainstreaming. The proposed design and monitoring framework and gender monitoring matrix encourage a gender responsive Anti-Crisis Plan, with specific measures to protect the welfare and livelihoods of women. 34. Safeguards. The loan is categorized C for environment, involuntary resettlement, and indigenous peoples. The loan funds are not expected to cause land acquisition or adverse impacts to the environment or indigenous peoples. Investment activities prohibited under ADB’s Safeguard Policy Statement (2009) will be excluded. 35. Risks and mitigation measures. Major risks and mitigating measures are summarized in Table 3 and described in detail in the risk assessment and risk management plan.72

Table 3: Summary of Risks and Mitigating Measures Risks Mitigating Measures The government lacks the technical expertise for countercyclical expenditure package implementation, causing subdued benefits. Ineffective coordination across government agencies and development partners may negatively affect the implementation of the anti-crisis plan

Continuous technical and policy engagement by ADB and other development partners, including the IMF, with the government. ADB provides technical assistance under other programs which have been mobilized to support the government throughout implementation. ADB regularly engages with all development partners currently involved in the financing and implementation of the Anti-Crisis Plan. Through the MOF and with the support of the MEL Lab, ADB will liaise with relevant Ministries, Departments and Agencies to ensure close and adequate monitoring of the implementation of the program.

ADB = Asian Development Bank; COVID-19 = coronavirus disease; IMF = International Monetary Fund; MEL = Monitoring, Evaluation and Learning, MOF = Ministry of Finance. Source: Asian Development Bank.

IV. ASSURANCES

36. The government has assured ADB that implementation of the Program shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the loan documents.

V. RECOMMENDATION 37. I am satisfied that the proposed Countercyclical Support Facility loan would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve the loan of €92,302,000 to Georgia for the COVID-19 Active Response and Expenditure Support Program, from ADB’s ordinary capital resources on regular terms, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 10 years, including a grace period of 3 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan agreement presented to the Board.

Masatsugu Asakawa President

21 May 2020

72 Risk Assessment and Risk Management Plan (accessible from the list of linked documents in Appendix 2).

16 Appendix 1

DESIGN AND MONITORING FRAMEWORK

Country’s Overarching Development Objective Health and economic impacts of COVID-19 in Georgia are mitigated, protecting the most vulnerable

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks Effect of the Program Rate of spread of the disease managed, burden on affected businesses mitigated and poverty containedb

a. By December 2020, the doubling rate of COVID-19 confirmed cases is reduced to 20 days or more (April 2020 baseline: every 10days) b. By September 2020, the number of SME employees is retained at 62% of total employees in the business sector, 40% of whom are women. (April 2020 baseline: 67% of workers hired in the business sector are employed by SMEs, 40% of whom are women) c. By December 2020, the number of individuals scoring 0-65,000 on MOILHSA’s proxy means testing is retained at 120% of pre-crisis levels. Share of women remains at 55% or lower (April 2020 baseline: 389,000 individuals score 0-65,000 in TSA PMT, 55% of whom are women)

a. IACC and MOILHSA report submitted by September 2020 b. Report by the Revenue Service submitted by September 2020. c. Report by MOILHSA submitted by December 2020.

COVID-19 pandemic is not contained within 2–3 months leading to extension of State of Emergency and containment measures.

Reform Areas 1. Measures taken to combat the spread of COVID-19 and health sector response capacity strengthened.

By December 2020: 1.1 Government publishes a COVID-19 dedicated web page (www.stopcov.ge) which includes detailed information on the list of NPIs adopted by the government to keep the burden on the health system to a minimum. The website includes specific information regarding health protocols for pregnant persons, childbirth and breastfeeding during COVID-19. (2019 baseline: no containment measures in place before 2020). 1.2 COVID-19 related diagnosis and treatment costs are provided free of charge for people living below the official poverty line to avoid out of pocket payments related to COVID-19 (Baseline: no COVID-19 cases before 2020)

1.1 Government resolution on containment measures published and content disseminated through social media.

1.2 Quarterly MOILHSA report

Ineffective coordination across government agencies and insufficient capacity may negatively affect planned health and socioeconomic responses during crisis.

Appendix 1 17

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks 1.3 MOILHSA provides adequate PPE to all frontline health workers (in sizes suitable for both women and men), 62% of whom are women. i (April 2020 baseline: no COVID-19 cases before 2020)

1.3 Sex-disaggregated report on the number of health workers provided with PPE submitted to MOF by December 2020.

2. Affected private sector entities assisted

2.1 At least 4,000 SMEs in the tourism industry have their property and income tax payments deferred until 1 November 2020. At least 40% of beneficiaries are women-owned businesses i (April 2020 baseline: 0 firms provided with deferral on income and property tax payment) 2.2 At least 2,000 small and medium sized hotels benefit from subsidization of 80% of bank loan interest payments for 6 months; at least 40% of beneficiaries are women-owned small and medium-sized hotels c. (April 2020 baseline: subsidies for interest payment were not provided) 2.3 At least 35,000 agriculture entrepreneurs benefit from exception from amelioration fees and write-offs of any arrears on such fees. (April 2020 baseline: amelioration fees were not waived)

2.1 MOF sex- disaggregated report by December 2020 2.2 MOF sex-disaggregated report submitted by December 2020 2.3 MEPA sex-disaggregated report on number of beneficiaries from waivers of amelioration fees.

The government lacks the technical expertise for countercyclical expenditure package implementation, causing subdued benefits. Political Risk- Parliamentary elections are scheduled to be held in Georgia by October 2020. Changes in government may affect its commitment to reform measures envisaged under ADB support.

3. Enhanced livelihoods support for the most vulnerable segments of the population.

3.1 Employers are exempt from payment of income tax for the initial GEL750 for workers earning salaries up to GEL1500 for 6 months, provided their jobs are retained. (April 2020 baseline: no income tax exemption was provided) 3.2 Up to 350,000 workers who are laid off because of COVID-19 (temporarily or permanently) receive temporary unemployment assistance of GEL200 per month for a period of 6 months. (April 2020 baseline: severance pay limited to 1 month’s salary and borne by employer)

3.1 MOILHSA sex-disaggregated report on beneficiaries submitted by December 2020 3.2 MOILHSA submits sex-disaggregated report on number of beneficiaries by December 2020

18 Appendix 1

Results Chain Performance Indicators with

Targets and Baselines

Data Sources and Reporting

Mechanisms Risks 3.3 Up to 250,000 informal or self-employed workers who can demonstrate loss of income receive a one-time payment of GEL300. (April 2020 baseline: no unemployment benefit program for informal workers in place) 3.4 At least 41,000 persons, (including all women living with acute disabilities and children living with disabilities), receive GEL100 per month for a period of six months. (April 2020 baseline: GEL200 per month is paid to 31,956 children and people living with acute disability) 3.5 Shelf prices for at least 9 key food productsd retained for 6 months. (April 2020 baseline: no insurance against price increases in foodstuffs). 3.6 At least 1.2 million families benefit from subsidized utility bills for water, electricity and waste management for at least 3 months. (April 2020 baseline: no program for subsidizing utility bills)

3.3 MOILHSA sex-disaggregated report on number of beneficiaries submitted by December 2020 3.4 MOILHSA sex-disaggregated report is submitted by December 2020 3.5 Quarterly National Statistics Office of Georgia report on CPI 3.6 MEPA report submitted by December 2020

Budget Support Asian Development Bank: $100,000,000 (loan)

COVID-19 = coronavirus disease; CPI = consumer price index; IACC = Inter Agency Coordination Council; MEPA = Ministry of Environmental Protection and Agriculture; MOF = Ministry of Finance; MOILHSA = Ministry of Internally Displaced Persons, Labor, Health and Social Affairs; NPI = non-pharmaceutical intervention; PMT = proxy means testing; PPE = protective personal equipment; SMEs = small and medium-sized enterprises; TSA = Targeted Social Assistance. a Government of Georgia. Social-economic Development Strategy “Georgia 2020”. Tbilisi. b Because of uncertainties in how the outbreak will unfold, its economic effects, the need for government responses

to be flexible as the situation evolves, and because new data collection and reporting systems to monitor the crisis are being developed and evolving, it is not yet possible to set more specific and realistic targets than those presented in the design and monitoring framework. Additional indicators to measure the effects will be identified at a later stage and used to report on the program’s effectiveness as comprehensively as possible in the project completion report.

c Hotels with up to and including 50 rooms. d Includes: rice sunflower oil, sugar, wheat, beans, pasta, buckwheat, milk powder products, and flour. i During project implementation, targets may be revised once sex-disaggregated data are collected. Source: Asian Development Bank.

Appendix 2 19

LIST OF LINKED DOCUMENTS http://www.adb.org/Documents/RRPs/?id=54191-001-3

1. Loan Agreement

2. Development Coordination

3. Country Economic Indicators

4. International Monetary Fund Assessment Letter

5. Summary Poverty Reduction and Social Strategy

6. Risk Assessment and Risk Management Plan

7. List of Ineligible Items

8. Gender Monitoring Matrix

9. Debt Sustainability Analysis

Supplementary Document

10. Safeguards Assessment Matrix

20 Appendix 3

Appendix 3 21

22 Appendix 4

ASSESSMENT OF COMPLIANCE WITH THE ACCESS CRITERIA FOR THE COUNTERCYCLICAL SUPPORT FACILITY AND COVID-19 PANDEMIC RESPONSE OPTION

Access Criteria Asian Development Bank Assessment

1. Adverse Impact of Exogenous Shocks

The first confirmed case of COVID-19 in Georgia was reported on 26 February, imported by a citizen returning from Iran via Azerbaijan. As of 19 April 2020, 394 cases had been reported and four deaths confirmed. The doubling time of total confirmed COVID-19 cases stood at 8.76 days. a The relatively low number of confirmed cases, deaths and doubling time attests to the effectiveness of the strict containment measures adopted by the Government on 21 March 2020, as it declared state of emergency. The pandemic and ensuing containment and behavioral responses are dampening potential GDP growth in Georgia, lowering tax revenues, and putting pressure on the lari (11.2% depreciation against the USD between February and April 2020).b Lower growth in trading partners is expected to significantly lower exports (-24%) and remittances (-15%). Heightened global uncertainty will hamper confidence, reduce capital inflows (-19% growth in FDI), and delay investment. High headline inflation in 2019—at 7% as a result of nominal depreciation—is expected to decrease to 3.5% in 2020 because of lower commodity prices and subdued domestic demand. c According to recent IMF and MOF estimates, reduction in economic activity is expected to bring growth to -4 percent in 2020, against the original estimate of 4% growth in 2020 and in sharp contrast with the 4.9% growth average in the period 2016–2019. c Georgia’s external position in 2019 was favorable. The current account deficit narrowed to a record low (5.1 percent of GDP) driven by a favorable trade balance. The completion of significant FDI projects helped contain imports and the NIIP. Gross international reserves reached $3.5 billion in 2019, boosted by the foreign exchange interventions by the National Bank of Georgia, larger-than-expected inflows, and lower-than-expected government foreign exchange expenditures. c The COVID-19 shock is expected to widen the current account to 11.3% in 2020, exacerbating pressures on the NIIP and reserves, and weakening the external position. Continued prudent fiscal policy, exchange rate flexibility, and structural reforms implementation remain essential to safeguarding external sustainability over the medium-term. A protracted crisis is limiting the fiscal space needed to mitigate health and economic impacts. A decline of 23.3% in revenue collection against the original estimate for 2020, led by a reduction of 1.6% in the tax–GDP ratio, will widen the fiscal deficit to 8.1% against the original estimate of 2.2% of GDP.d The government’s ability to meet gross financing needs is further constrained by growing uncertainty in the financial markets resulting in higher costs of borrowing. Economic slowdown in 2020 threatens the development gains Georgia achieved since 2012. The unemployment rate, which reached a record low in 2019 at 11.6% in 2019, could triple if no public intervention is adopted to avoid mass layoffs.e Taking into account the measures put in place by the

Appendix 4 23

Access Criteria Asian Development Bank Assessment government to avoid spikes in unemployment, the rate of unemployment is expected to rise to 19% in 2020. d Such sharp increases in unemployment could eradicate years of inclusive economic growth, reversing a decade-long decline in absolute poverty. While absolute poverty ($1.90/day) has declined sharply from 12.2% in 2010 to 3.7% in 2019, the effects of COVID-19 are expected to lead to a rise in poverty incidence to 4.3%, in a best-case scenario, or 6.8%, in a worst-case scenario. Further, as of 2018, 47% of Georgians were estimated to remain vulnerable to poverty, with monthly incomes precariously close to the poverty line, placing a significant share of the population at risk of poverty due to decline in incomes and a rise in unemployment.f

2. Countercyclical development expenditures

The government announced a GEL3.5 billion ($1.1 billion) Anti-Crisis Plan, to cover higher spending in the health sector amounting to GEL350 million ($111 million), provide assistance to affected private sector entities worth GEL2,110 million ($671 million), and support the unemployed, poor and vulnerable with a GEL1.035 billion ($329 million) social assistance package. The total expenditure package amounts to 7.4% of GDP, one of the highest in the region. The government has also adopted a range of countercyclical monetary policy measures for price stability and adequate liquidity in the financial system. Georgia’s Anti-Crisis Plan effectively addresses the needs of the poor and vulnerable including women, children and people living with disabilities across its three areas of focus: (i) health intervention; (ii) support to affected businesses; and (iii) support to social programs. It’s support to the health system will help protect frontline medical doctors, 62% of which are women, through the procurement of adequate PPEs. Under this Plan, the government plans to ensure that health services related to COVID-19 are provided for free, safeguarding the poorest in society from increased health expenditure and out-of-pocket payments, and will ensure that it provides COVID-19 diagnosis and treatment services in areas with high density of Internally Displaced Persons from the occupied territories. Under its private sector support package, the government will protect all the 40% of Georgians living near the poverty line, who rely on labor income for their livelihoods, by containing mass layoffs. Targeted support to firms in the tourism industry is particularly important to safeguard the economic well-being of Georgian women, who constitute 60% of hired workers in the sector. Support to SMEs is also of critical importance to safeguard progress made in the economic empowerment of women in recent years. As of 2018, 67% of all women employed in the private sector worked for SMEs, and 33% of them are now owned or managed by women. g

3. Pre-shock Record of sound macroeconomic Management

As noted by the IMF, “the COVID-19 outbreak has hit the Georgian economy hard [and] growth prospects for 2020 have weakened sharply” a as a result of it. Prior to the COVID-19 pandemic, Georgia’s economy expanded at an average of 4.7% between 2011–2019 and was expected to grow by 4.3% in 2020. Public debt–GDP, the fiscal deficit and total expenditure as a share of GDP were all expected to remain below their maximum ceilings, at 44.5%, 2.2% and 28.3% respectively. Reforms to tax administration led to a

24 Appendix 4

Access Criteria Asian Development Bank Assessment higher-than anticipated tax revenue collection, reaching 23.7% of GDP in 2019. g The only significant risk faced by the authorities prior to COVID-19 stemmed from inflationary pressures, which the National Bank of Georgia targeted appropriately through tightened monetary policy. The banking sector’s performance was also expected to remain robust, with an increase in credit to the private sector, improved asset quality and higher liquidity despite marginally lower profitability. Previous assessment letters and Reviews under the Extended Financing Agreement suggested gradual and continuous improvement of macroeconomic management in Georgia. The IMF’s favorable assessment letter confirm ADB staff’s assessment that the economic downturn is due to the COVID-19 pandemic, not to previous macroeconomic mismanagement.

4. Structural reforms and pandemic response plan

38. Georgia’s response to COVID-19 follows a two-pronged approach: an initial temporary emergency relief package and the continuation of critical structural reforms to ensure the adequacy of its social welfare and public health systems within a sustainable macro-fiscal framework. As an immediate response to the COVID-19 crisis, the government established the IACC under the direction of the Prime Minister in February 2020. The IACC has taken decisive and credible steps to contain the spread of COVID-19 and mitigate the recessionary impact on the economy. The declaration of a national state of emergency in March 2020 was followed by the publication of an extensive list of containment measures and, in April 2020, the announcement of a comprehensive response package supporting health sector resilience in the medium-term. The health sector response revolves around five key areas of intervention: Case detection and confirmation: The government will procure necessary medical hygiene materials, COVID-19 test kits, laboratory reagents, polymerase chain reaction equipment, and specimen transport kits. It will be supported by investment in information technology systems for disease surveillance and contract tracing. Isolation of high-risk individuals: The government will ensure that high risk individualsh are placed in specially organized quarantine facilities. Improving the quality of medical care: To improve the quality of medical care provided and minimize risks of infection to health personnel, the government will train at least 2,000 medical staff, procure essential medical goods and carry out rapid conditioning of designated public health facilities. Patient care and case management: The government has committed to providing free access to all diagnostic, laboratory and treatment costs of COVID-19 patients in public and private facilities. Infrastructure investment: Government is investing in capacity improvements of designated public facilities, including hospitals that serve a large internally displaced persons (IDP). In addition to its medium-term health response plan, Georgia has made credible commitments to continue pursuing structural reforms under International Monetary Fund Extended Fund Facility as well as planned policy reforms supported by ADB. These reforms include (i) structural policy reform in public sector management to ensure the fiscal sustainability of government operations in the medium term; (ii) capital

Appendix 4 25

Access Criteria Asian Development Bank Assessment market reforms to support the de-dollarization of the financial sector and reduce external vulnerabilities; (iii) reforms to the education system to improve job matching, productivity, and wages; (iv) operationalizing pension reforms; (v) continuing business environment reforms, e.g., requiring corporations to publish audited financial statements based on International Financial Reporting Standards (IFRS); (vi) developing land cadasters to help protect property rights and simplify land transactions; and (vii) reforms to benefit from Georgia’s free trade agreements (FTAs).

5. Debt sustainability Public debt–GDP ratio has been stable in recent years, hovering below 45% of GDP. Despite an expected substantial increase in 2020, led by temporary spending financed by development partners and domestic borrowing, ADB assessment concludes public debt remains stable in all standardized stress tests and is expected to remain sustainable over the medium-term.d The CARES Program will have a minimal impact on Georgia’s debt–GDP ratio and will amount to 1.03% of public debt in 2020. With the CARES Program, public debt–GDP ratio will increase from 61.6% to 62.4% of GDP. Financial assistance from the ADB will not aggravate Georgia’s debt vulnerabilities and fiscal risks in the medium term. While providing critical countercyclical support to the economy, the proposed ADB loans in the amount of $100 million represent just 1.3% percent of Georgia’s public debt stock of nearly $7.6 billion. The planned total amount of ADB budget support for 2020, in the amount of $630 million, represents just 8.3% of Georgia’s public debt stock. These loans will not add significantly to the annual debt service obligations facing the Government. Additional loans approved or under proposal by the World Bank ($180 million), the International Monetary Fund ($200 million), the Agence Française de Développement ($205 million), the KfW ($100 million), the European Union ($95 million), and the Asian Infrastructure Investment Bank ($100 million) would jointly add another 11.6% to the public debt stock. Together, lending from all these institutions would lift public debt initially to 72% of GDP in 2020, and to 58% of GDP by 2024.

6. Coordination the International Monetary Fund

ADB has consulted with IMF and is in close contact with its relevant staff on macroeconomic monitoring. IMF has a favorable assessment letter (linked documents 9). In the Assessment Letter, the IMF share ADB staff’s assessment that the government’s fiscal response to the adverse effects of the COVID-19 pandemic on the economy is appropriate. The IMF considers that despite a spite a sharp increase in the public debt–GDP ratio in 2020, medium-term fiscal consolidation will bring public debt (net of government deposits) below 45% of GDP by 2024 and is sustainable in the medium-term. The IMF has reached staff-level agreement on an augmentation of access of 130% of quota under the Extended Fund Facility, helping the government meet shock-related needs, and build buffers.

ADB = Asian Development Bank; CARES = COVID-19 Active Response and Expenditure Support; COVID-19 = coronavirus disease; FTA = free trade agreement; GDP = gross domestic product; IACC = Inter Agency Coordination Council; IDP = internally displaced person; IFRS = International Financial Reporting Standards; IMF = International Monetary Fund; KfW = Kreditanstalt für Wiederaufbau; MOF = Ministry of Finance; NIIP = net international investment position; PPE = personal protective equipment; SME = small and medium-sized enterprise. a Information retried from StopCov.ge on 20 April 2020. b National Bank of Georgia. Official Exchange Rate of Lari Against Foreign Currencies. (accessed 7 May 2020).

26 Appendix 4

c IMF. 2020. Georgia:Sixth Review Under the Extended Arrangement and Requests for a Waiver of Nonobservance of Performance Criterion, Modification of Performance Criteria, and Augmentation of Access-Press Release; Staff Report. Washington DC. d Ministry of Finance estimates. e L. Pavlenishvili. 2020. The Social Impacts of COVID-19—Case for a Universal Support Scheme? Tbilisi: International School of Economics at TSU Policy Institute. f ADB. 2020. COVID-19 and Poverty: Some Scenarios Based on Grouped Distribution Data on Household Consumption. Manila. g Geostat. 2019. Women and men in Georgia. Tbilisi. h This includes individuals with international travel history or with suspected contacts. Source: Asian Development Bank.