WASHINGTON, Aug 6 (Reuters) - The International Monetary Fund on Thursday increased Georgia’s loan program by $423.5 million to over $1.1 billion, saying the impact from the global financial crisis will likely last into 2010 despite signs the economy may have reached its trough.
The loan program had been at $748.3 million, which was approved in September 2008 to rebuild reserves and bolster investor confidence following a five-day war with Russia.
The IMF also agreed to released the next tranche under the program of $148.4 million after approving the third review of the program.
“Risks remain elevated due to uncertainties about the international economic environment and the strength of the recovery of private capital inflows and bank credit,” said IMF Deputy Managing Director Murilo Portugal.
“Against this background, the authorities’ economic strategy aims to support the incipient recovery by maintaining an expansionary fiscal stance in 2009, specifically by allowing revenue shortfalls to be fully accommodated in a widening of the fiscal deficit,” he added.
Starting next year the authorities have committed to a “strong” fiscal adjustment by reducing expenditures, Portugal said.
While the withdrawal of fiscal stimulus may dampen demand, such actions were necessary to preserve investor confidence and restore access to global capital markets, he added.
“The emphasis placed by the authorities on expenditure reduction as the primary instrument of adjustment — while safeguarding social spending — is appropriate but revenue measures should not be excluded if necessary,” he added.
Portugal said monetary policy options were limited by high dollarization in the economy and constraints in banks’ balance sheets.
“As traditional monetary policy tools regain traction and the economy recovers, the authorities intend to adjust the monetary policy stance to preserve the gains made in terms of disinflation,” he said. (Reporting by Lesley Wroughton; Editing by Leslie Adler)