managing expenditures pressures for sustainability and growth

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Georgia

Public Expenditure Review

Managing Expenditure Pressures

for Sustainability and Growth

74474


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Report No.

GeorgiaPublic Expenditure Review

Managing Expenditure Pressures forSustainability and Growth

November 2012

Poverty Reduction and Economic Management Unit

Europe and Central Asia Region


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CURRENCY EQUIVALENTS

(Exchange Rate as of November 15, 2012)

Currency Unit: Georgian Lari

US$1.00 = 1.6662 GEL

Weights and Measures: Metric System

Abbreviations and Acronyms

BCR Beei-Cs Rai IMF International Monetary Fund

BDD Basic Data and Directions LSMS Living Standards Measurement Survey

CAD Crre Acc Deici MIP Medical Insurance Plan

CBA Cs-Beei Aalsis MIS Management Information System

CEA Cost Effectiveness Analysis MoF Ministry of Finance

CIF Curatio International Foundation MoLHSA Ministry of Labor, Health, and Social Affairs

DBOMT Design-Build-Operate-Maintain and Transfer MRDI Ministry of Regional Development &Infrastructure

DPO Development Policy Operation MTEF Medium Term Expenditure Framework EBRD European Bank for Reconstruction and

DevelopmentOOP Out-of-pocket Payment

EC European Commission PER Public Expenditure Review

EU European Union RAMS Road Asset Management System

FDI Foreign Direct Investment RD Road Department

GDP Gross Domestic Product RDD Regression Discontinuity Design

GEL Georgian Lari RHS Reproductive Health Survey

GMI Guaranteed Minimum Income SOEs State-Owned Enterprises

HBS Household Budget Survey SSA Social Services Agency

HDM Highway Development and Management Model TSA Targeted Social Assistance

HUES Health Utilization and Expenditure Survey VAT Value Added Tax

IDA International Development Association WHO World Health Organization

IDPs Internally Displaced Persons

Vice President: Philippe Le Hourou

Country Director: Henry Kerali Sector Director: Yvonne Tsikata Sector Manager: Ivailo Izvorski Task Team Leader: Faruk Khan

MANAGING EXPENDITURE PRESSURES FOR SUSTAINABILITY AND GROWTH

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Contents

Preface ixExecutive Summary xi

Chapter 1. Macroeconomic Context and Expenditure Composition 1

1.1. Introduction 1

1.2. Macroeconomic Context: Why is Fiscal Consolidation so Important? 2

1.3. Expenditure Composition 9

1.4. Conclusion: the way forward 17

Chapter 2. Social Protection Expenditures 19

2.1. Introduction 19

2.2. Overview of Social Protection Spending 20

2.3. Pension System 22

2.4. Social Assistance 32

2.5. Some Cross-Cutting Themes 39


Chapter 3. Health Expenditures 41


3.2. Overview of health spending in Georgia 42

3.4. Healh spedig ad iacial preci 47

3.5. Policy Issues 49


Chapter 4. Capital Budgeting Systems 59


4.2. Improving the Content and Presentation of Georgias Capital Budget 61

4.3. Strengthening the Broader Capital Budgeting System 69


Chapter 5. Road Sector Expenditures 83


5.2. Ke Isses i Ssaiabili ad Eficiec 84

5.3. The Road Network 86

5.4. Road Expenditures and Outputs to date 88

5.5. The Medium Term Road Investment Program 92

5.6. Isiial Arragemes fr Impred Eficiec 97



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List of Figures

Figure 1. GDP Growth, Investment, Savings xivFigure 2. External Debt, Current Account xiv

Figure 3. Fiscal Framework xv

Figure 4. Composition of Public Expenditures xv

Figure 5. Dependency Ratios in Georgia xvii

Figure 6. Pension Costs with Constant Replacement Rate xvii

Figure 7. Coverage of MIP xviii

Figure 8. Government and OOP Health Spending in ECA xviii

Figure 9. Road Network in Georgia Over Time xxi

Figure 1.1. GDP Growth, Exports, and Imports 3

Figre 1.2. CA Deici, Iesme, FDI, Saigs 3

Figure 1.3. Fiscal Framework 6

Figure 1.4. Fiscal Framework 6

Figure 1.5. National, Public, and Private Savings 8

Figure 1.6. Real Effective Exchange Rate 8

Figure 1.7. Expenditure Composition, Functional 11

Figure 1.8. Expenditure Composition, Functional 11

Figure 1.9. Expenditure Composition 12

Figure 1.10. Expenditure Composition 12

Figure 1.11. Public Capital Expenditures 13

Figure 1.12. Public Capital Expenditures 13

Figure 1.13. Current and Capital Expenditures Georgia and Selected Countries, 2010 14

Figre 1.14. Cmpsii f Epedires, Ecmic Classiicai, Gergia ad Seleced Cries 15

Figre 1.15. Cmpsii f Epedires, Fcial Classiicai, Gergia ad Seleced Cries 16

Figure 2.1. Social Protection Spending in Georgia and Region 21

Figure 2.2. Poverty Trends in Georgia, 200309 21

Figure 2.3. Pension trends in Georgia 23

Figre 2.4. Per Implicais f Icreases i Mhl Pesi Beei 23

Figure 2.5. Demographic trends in Georgia , 19902050 24

Figure 2.6. Pension Indicators under Alternative Scenarios, Without Indexation 25

Figure 2.7. Pension Indicators under Alternative Scenarios, with Price Indexation 26

Figure 2.8. Pension Indicators under Alternative Scenarios, With Wage Indexation 27

Figure 2.9. Pension Indicators with Combined Basic And Supplementary Pension Programs 28

Figure 2.10. Incentivizing Voluntary Savings in the Presence of a Basic Pension 29

Figure 2.11. TSA in Georgia 33

Figure 2.12. TSA Targeting and Coverage By Decile, 200911 34

Figure 2.13. Coverage and Targeting of TSA in International Context 34

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Figure 2.14. Cumulative Distribution of Consumption With And Without TSA 35Figure 2.15. Generosity of Georgias TSA Vis-a-Vis Other Social Assistance Programs 37

Figre 2.16. Age Disribi f tSA Beeiciaries, 2009 37

Figre 2.17. Labr Frce Sas f tSAs Wrkig Age Beeiciaries 37

Figure 2.18. No Impact of TSA Receipt On Labor Force Participation, 2007 38

Figure 3.1. Population Priorities for Government Investment In Georgia, 2010 41

Figure 3.2. Public and Private Health Spending, Europe and Georgia 43

Figure 3.3. Govt and Out-Of-Pocket Spending on Health in Europe and Georgia (2010) 43

Figure 3.4. Life Expectancy at Birth, Georgia and the World, 19702008 44

Figure 3.5. Cigarette Taxes in Georgia and Europe, 2009 46

Figure 3.6. Coverage of Preventive Care Services, Georgia Vs. Comparators 46

Figure 3.7. The Impact of Household Spending On Health On Poverty, 2010 48

Figure 3.8. Financial Protection and Equity Indicators, Georgia and ECA Comparators 48

Figure 3.9. Coverage and Targeting Of MIP, 200911 51

Figure 3.10. Out-of-Pocket Spending per Episode 51

Figure 3.11. Pharmaceutical Price and Availability Trends, 20092011 55

Figure 3.12. Brand and Generic Drug Prices, Georgia and EU 55

Figure 3.13. Estimated Average Combined Wholesale and Retail Margins, Georgia and Selected EU Countries 56

Figure 3.14. First Place of Contact When Ill, Georgia and Regional Comparators 57

Figure 4.1. The Project Cycle 69

Figure 5.1. Evolution of Road Expenditures and Outputs 89

Figure 5.2. Condition of the International and Secondary Road Networks 90

Figure 5.3. Sharp Decline in Periodic Maintenance Funding in Recent Years 90

Figure 5.4. Periodic MaintenanceActual 200710 versus Need 201019 96

Figure 5.5. Government Roads Program and Alternative Illustrative Scenario 97

List of Boxes

Box 2.1. Tax Treatment For Funded Pension Systems 31Box 4.1. Rationale for Introducing a Capital Budget 62

Box 4.2. A More Comprehensive Estimate of State Budget-Funded Capital Expenditure 66

Box 4.3. Proposal for Preliminary Assessment Form for Major Projects 75

Box 4.4. Examples of methodological guidelines from other countries 78

Box 4.5. Main Contents of US Capital Programming Guide 81


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List of Tables

Table 1. Policy Options for Consideration to Manage Fiscal Expenditure Pressures xiitable 2. Sregheig Capial Bdgeig: Ieraial Pracice i Ideiicai, Preparai,

and Appraisal xix

Table 3. Road Network in Georgia in International Context xxi

Table 1.1. Georgia: Selected Economic Indicators, 20032011 5

Table 1.2. Georgia: External Financing 200715 7

Table 1.3. Georgia: Composition of Medium Term Expenditure Framework (201115) 10

Table 2.1. Overview of Social Spending in Georgia, 200811 20

Table 2.2. Old-age Pensions Accounts for the Bulk of Social Spending 22

Table 2.3. Poverty Rate in Georgia with and without Old-age Pensions 23

Table 2.4. Incidence of TSA by area (rural/urban) 35Table 3.1. Average Annual Per Capita Out-Of-Pocket Payments, By Category (2010) 43

Table 3.2. Utilization Rates in Georgia Are Low (2010) 45

Table 3.3. Coverage of Key Health Interventions in Georgia is Low 45

Table 4.1. Alternative Figures for Capital Expenditure from State Budget 65

Table 1. Estimates of Total Capital Expenditure and its Functional Distribution 66

table 4.2. Ieraial Eperiece i Ideiicai, Screeig, ad Appraisal 74

Table 4.3. Assessment techniques by project value in Ireland 78

Table 5.1. Road Network in Georgia 86

Table 5.2. Road Coverage in Selected Countries 87

Table 5.3. Expenditures on International and Secondary Road Networks (20042010) 89Table 5.4. State Government Transfers and Expenditures on Local and Urban Roads 91

Table 5.5. Actual and Planned Road Expenditures, 20072014 93

Table 5.6. Asset Value of Road Network in Georgia 94

Table 5.7. Alternative Illustrative Scenario for the Medium Term Road Program 95

Table 5.8. Value for Money: Cost and Time Savings: State of Florida 19971998 99

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Preface

this pblic epedire reiew (PER) is he resl f a bd f prgrammaic iscal wrk direced a ideifig

plic pis maage iscal cslidai i Gergia. the prgrammaic iscal aalsis has bee cdced i

close coordination with Government counterparts, and has used intermediate outputs of the ongoing analyses,

including power-point presentations, just-in-time policy notes, and missions as inputs into a continuous dialogue

he Germes ie-ig f is pblic epedire plic. Speciic eamples f ips i his dialge

include a policy note and presentation on Strengthening Capital Budgeting in Georgiato inform preparation

of the 2011 capital budget; a policy note and presentation on pension reform to inform the Governments

deliberais i 2011 pis raise pesis; ad a preseai ke idigs ad messages f he PER

ifrm he 2012 bdge preparai; ad a earlier preseai plic pis fr reiacig Gergias

Erbd. the prgrammaic iscal wrk has cmplemeed he dialge he prgrammaic Deelpme

Policy Operation (DPO) series.

This PER was prepared by a Bank team comprising Faruk Khan (Task team leader), Owen Smith, Anita Schwarz,

Simon Groom, Mirtha Pokorny, Elene Imnadze, Mariam Dolidze, Sergiy Biletskyy, Nino Moroshkina, Elizabeth

Currie, and Thordur Jonasson. The primary authors of the report are Faruk Khan (chapter 1, with inputs from

Mariam Dolidze), Owen Smith (chapters 2 and 3), Anita Schwarz (pension part of chapter 2), Simon Groom

(chaper 4), ad Mirha Pkr (chaper 5). the repr als beeied frm cmmes ad sggesis receied

from Jean-Francois Marteau, Benjamin Gericke, Joseph Melitauri, Rodrigo Archondo-Callao, Tamara Sulukhia,

Ahmed Eiweida, Ramya Sundaram, Meskerem Mulatu, Rashmi Shankar, and Pedro Rodriguez. Zakia Nekaien-

Nowrouz assisted with formatting the report.

the eam has beeied frm he gidace f Her Kerali (Cr Direcr), Asad Alam (frmer Cr

Director), Yvonne Tsikata (Sector Director), and Ivailo Izvorski (Sector Manager). Kazi Matin provided guidance

at earlier stages of the analysis. The peer reviewers were James Brumby and Marijn Verhoeven. Shabih Mohib

and Rosa Maria Alonso Terme provided comments at concept stage.

the eam is graefl germe ficials frm he Miisr f Fiace, Miisr f Labr, Healh, ad Scial

Affairs, Ministry of Infrastructure, the Roads Department, the National Bank of Georgia, and other branches of

government for their cooperation in conducting the analysis and for their comments and suggestions on various

drafts of the work.


PREFACE |ix


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Executive Summary

Economic growth has rebounded strongly in Georgia during 201012 and commendable iscal

consolidation has been implemented, although considerable medium-term macro-iscal challenges

remain. Growth rebounded strongly to 6.7 percent a year during 201011, but the external current account

deici remais large a 11.8 perce f GDP i 2011. Eeral repame bligais drig 201214 are

sigiica, alhgh he ahriies hae bil iscal bffers help maage he pames de. Gergia als

remains vulnerable to the possibility of a sharper global downturn related to the evolving euro-zone crisis. In

addii, aial saigs are isficie iace he ecessar iesme ad eprs ad radables hae

not yet begun to serve as the engine of rapid economic growth. In this context, the authorities have implemented

a cmmedable iscal cslidai prgram, wih he erall iscal deici dw frm 9.2 perce f GDP i

2009 to 3.6 percent in 2011, to serve as a cornerstone of sustainability.

To meet the challenge of generating rapid and sustainable growth in an uncertain global environment,

Georgia will need to continue to implement and potentially deepen its iscal consolidation program.

Addressig he grwh ad ssaiabili challeges ed abe will reqire frher redcig he erall iscal

deici frm 3.6 perce f GDP i 2011. this will creae addiial space fr a iscal respse i he ee f a

sharp global economic shock and also further bolster debt sustainability. Furthermore, in the event of an upside

grwh sceari wih higher freig direc iesme ad capial ilws, deepeig iscal cslidai is a

pi ha ma help pree ersi f aial saigs, aid a wideig f he crre acc deici, ad

resist real exchange rate appreciation pressures.

This public expenditure review (PER) considers possible sources of expenditure pressure that may

affect the iscal consolidation program and suggests options to manage them. There is broad consensus,

derpied b he germes medim erm macr-iscal framewrk, ha iscal cslidai will

require reducing overall expenditures by about 3 percentage points of GDP through 2015. At the same time,

csiderable scial ad ifrasrcre eeds remai i a eirme where he ppriies erac iscal

space from other areas has diminished. Social expenditure pressures arise from the need to provide adequate

ld-age icme a agig pplai ha relies primaril he basic pblicl fded pesi beei.

Additional pressures arise from the need to improve social assistance coverage of the poor and from the need to

impre healh cmes ad iacial preci agais imperishig f pcke healh pames. Capital

expenditure pressures arise from the need to rehabilitate and reconstruct a large backlog of the secondary

and local road network in poor condition, as well as from continued improvement of the main international

East-West Highway. Additional pressures arise from new investment needs in the energy, water, agriculture,ad regial deelpme areas. Cied implemeai f he iscal cslidai prgram will reqire

managing these underlying pressures in a systematic fashion, so that expenditures do not exceed currently

envisaged levels.

This PER presents a number of options for consideration to manage iscal consolidation, which can

contribute toward greater selectivity in capital expenditures, enhanced sustainability of the road

investment program, and containing medium-term social expenditure pressures. the speciic pis

for consideration are outlined in Table 1. In the event of an upside growth scenario, deepening the planned


ExECutIvE SuMMARy |xi


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iscal cslidai b saig a par f he addiial reees ca pree ersi f aial saigs ad keep

external imbalances in check, while encouraging a shift toward a sustainable growth path driven by tradables.Capital expenditures can make a greater contribution to adjustment going forward, with most adjustment

to date coming from current expenditures. The pension options aim to avert large unsustainable jumps in

pesi css, se epecais a ssaiable leels, ad ease pressre he basic beei. I scial assisace,

1 the laes appred iscal framewrk eisages a cslidai f erall epedires b 3 perceage pis f GDP frm 2011 2015, wih parof this coming from capital expenditures. The authorities have noted that the level and composition of the expenditure consolidation path needs to beailred he elig lcal ce, wih he erall gal f saig rack wih iscal cslidai. the aailabili f ccessial iacig adelig eeds fr cmpeiieess ehacig pblic iesme are impra csiderais fr maiaiig iscal sabili ad grwh.

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Table 1. Policy Options for Consideration to Manage Fiscal Expenditure Pressures

Policy Area Option for Consideration Sequencing Expected Impact

Macro-Fiscal

Maiai iscal disciplie b frher redcigerall iscal deici frm 3.6 perce f GDPin 2011 through further consolidation ofexpenditures by 3 percentage points of GDPby 2015

Short/Mediumterm Creae addiial iscal space

for response to global shocks;prevent erosion of nationalsavings and widening ofcrre acc deici

In event of upside growth scenario fromhigher FDI ad capial ilws, deepe iscalconsolidation by saving additional revenuesad blserig iscal bffers

Short/Mediumterm

ExpenditureComposition

Enable capital expenditures to make acontribution to expenditure consolidationgoing forward, particularly as privateinvestment picks up1

Short/Mediumterm

Maintain balance betweensocial and capital expenditureneeds

Collective impacton expenditurepressures in2015:

-2.8% of GDP(Breakdownbelow)

Manage expenditure consolidation throughgreater selectivity in capital expenditures,containing medium term social expenditurepressures, and enhancing sustainability ofroad investment program (greater detail oneach below)

Pensions

Seleciel arge a frher sigiica e-ime jmps i he basic pesi beei

Short term Aid jmp i iscal css adenhance equity

-3.2% of GDP

Explore mechanism to limit medium-termgrwh f he basic pesi beei mreha he rae f ilai

Medium termProtect purchasing powerand set expectations atsustainable levels

Develop voluntary savings for retirement byundertaking diagnostic of impediments andpolicy initiatives in the areas of tax treatment,p- s. p-i, ad iacial isrmes

Medium termEase pressure for ad hocad ssaiable beeiincreases

SocialAssistance

Improve TSA coverage of poor throughimproved outreach and proxy-means formula

Short termEnhance equity of overallscial beeis

+0.2% of GDPPrioritize TSA over universal programs(e.g., pensions and energy vouchers) for anyadditional social spending increases

Link TSA recipients to employmentopportunities and human capital investments

Medium termReduce pressure on TSA inmedium term

Health

Reduce high out-of-pocket pharmaceuticalspending by promoting use of generics

Short term

Improve health outcomes andreduce impoverishing out ofpocket health payments

+0.3% of GDPAddress weaknesses in supply of medical care,with focus on primary care

Medium term

Expand state-funded health insurancecoverage with focus on lower deciles onpopulation

Medium term

(continued to next page)


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he pis aim impre effecieess f erall scial beeis ad redce pressre he argeed scial

assistance (TSA) program in the medium term. In health, the options seek to improve health outcomes and

iacial preci agais imperishig -f-pcke pames. the pis sreghe capial bdgeig

seek ms effeciel maage he grwig pipelie f ifrasrcre prjec eeds wihi he iscal eelpe

by improving transparency and by improving screening and selection of projects. The options in the road sector

seek frher impre lg r eficiec ad ssaiabili f he rad iesme prgram. Clleciel,

his se f sggesed measres ca help Gergia maage he epedire pressres peraiig he iscal

consolidation program, thus mitigating the risk of expenditures exceeding envisaged levels while supporting

improved development outcomes.

The policy options discussed above could collectively curtail expenditure pressures estimated at

about 2.8 percent of GDP by 2015. In other words, without the policy options, the underlying pressures

could potentially push overall expenditures in 2015 to 31.8 percent of GDP instead of the currently envisaged

29 percent. While the exact magnitude of the impact would depend on the extent of the underlying pressures and

he eficac f he speciic pis adped crail hem, he impac wld cme frm he fllwig srces. Alarge part of the savings (3.2 percent of GDP) would come from averting large ad hoc jumps in the basic pension

beei b limiig is medim grwh greaer ha he rae f ilai, while deelpig lar saigs

for retirement. Both of these measures would ease expectations from a growing old age population for a higher

replaceme rae frm he basic beei.2The options to improve coverage of the targeted social assistance and

2 I he cerfacal sceari, he pesi beei replaceme rae rises ab 24 perce f he real wage b 2015 (eqiale he replacemerae if he beei had icreased GEL 165 fr all frm Sepember 2012), while he sceari fr he recmmeded refrms is ide he basic beeifrom nominal levels announced for September 2012 (GEL 100 for all and GEL 125 for those age 67 and over).


ExECutIvE SuMMARy |xiii

Table 1 continued

Policy Area Option for Consideration Sequencing Expected Impact

CapitalBudgeting

Further improve content and presentationof capital budget by extending coverage,demsraig csisec i iacialifrmai, ad deepeig -iacialinformation

Short termTransparency/accountability;strengthen public investmentprogramming

-0.8% of GDP

Introduce a systematic preliminaryassessme ad prjec ideiicai prcess

Medium term

Strengthen screening andselection among competingpublic investment projectproposals

Develop uniform methodological guidance onappraisal techniques

Medium term

Strengthen strategic guidance Medium term

Develop systematic comprehensive capitalbudgeting system guidelines

Medium term

Road Sector

Increase routine and periodic maintenanceexpenditures in line with HDMrecommendations, as allowed by resourceconstraints

Short term

Improve long runssaiabili ad eficiecof road investment program

+0.7% of GDP

As EW Highway investment winds down,phase in rebalancing of outlays forrehabilitation and new construction toreduce backlog of secondary network in poorcondition

Medium term

Develop a viable system for attending toneeds of local road network by initiatingrehabilitation of target subset

Short term

Put in place institutional arrangements toimpre rad epedire eficiec

Short/Mediumterm


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medical insurance programs would cost about 0.2 percent and 0.3 percent of GDP, respectively, in 2015.3The

measres idce greaer selecii ad eficiec i capial bdgeig are esimaed sae 0.8 perce

f GDP (assmig a 10 perce impreme i eficiec wih impacig grwh prspecs). Fiall, he

measres impre ssaiabili ad eficiec f rad iesme are esimaed cs ab 0.7 perce f

GDP, with higher rehabilitation and maintenance expenditures for secondary and local roads offset in part by

phased winding down of new construction expenditures by 2015.

Macro-iscal context

Georgia has established a record of sound macroeconomic management since 2004 that has contributed

to robust growth and declining public debt levels. Following the Rose Revolution in 2003, far-reaching

srcral refrms sreghe pblic iaces ad impre he bsiess eirme helped bs grwh

9.3 percent per year during 200407. Tax revenues increased from 14.6 percent of GDP in 2003 to 25.8 percent

i 2007 ad alhgh he iscal deici rse drig his perid, i was mre ha fll iaced b higher

privatization receipts. External public debt declined from 45 percent of GDP in 2003 to 16.8 percent in 2007.

As he dal shcks f he Ags 2008 clic ad he glbal iacial crisis resled i a sharp dwri grwh, he ahriies respded wih a cercclical iscal simls resre cidece ad sppr

ecmic recer. Grwh rebded srgl 6.3 perce i 2010 ad 7 perce i 2011, ad iscal

adjsme was implemeed safegard ssaiabili. the iscal deici declied frm 9.2 perce f GDP

in 2009 to 3.6 percent in 2011 and external public debt declined to 29 percent of GDP in 2011 from a peak of

33.6 percent in 2010.

Notwithstanding the sound record, Georgia faces macroeconomic challenges on two fronts

sustainability and growthand addressing both will require continued implementation and potential

deepening of the commendable iscal consolidation program. the crre acc deici has declied frm

3 Fr tSA, his assmes a 20 perce icrease i cerage ad 10 perce icrease i beeis; fr MIP, i assmes a 25 perce icrease i cerage ad25 percent higher premiums as utilization starts to rise.

xiv| ExECutIvE SuMMARy


Figure 1. GDP Growth, Investment, Savings Figure 2. External Debt, Current Account

in percent and percent of GDP in percent of GDP

GDP growth National savings (% GDP) Investment (% GDP) External public debt (lhs) Total external debt (lhs) Current account balance (rhs)

Source: Georgian authorities and World Bank staff estimates. Source: Georgian authorities and World Bank staff estimates.

35

30

-5

0

25

20

15

10

5

2005 2006 2007 2009 20112008 2010

70

0

60

40

20

10

50

30

2003 2004 2005 2006 2007 2009 20112008 2010

-25

-5

-20

-15

-10


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a peak of 21.8 percent of GDP in 2008, but remains high at 11.8 percent in 2011. Furthermore, while successful

reiacig f Gergias Erbd helped smh is pblic deb repame schedle, al pblic ad

priae repame bligais remai sigiica a ab $2.5 billi fr 201214 r ab 5 perce f GDP per

year, and total external debt remained relatively high at 58 percent of GDP in 2011.4A broader deterioration in

he glbal ecmic lk cld egaiel affec eprs, FDI, ad her capial ilws ha sppr grwh

i Gergia. I his ce, iscal cslidai prides he ke achr f ssaiabili b creaig addiialiscal space fr repames ad a ecessar respse a wider glbal shck. the Germes te Pi

Sraegic Deelpme Pla arges ssaiig rapid grwh ad redcig he crre acc deici b 2015.

However, national savings remains low at 14 percent of GDP in 2011 and the real exchange rate appreciated by

about 15 percent between July 2010 and April 2012, thus potentially eroding the competitiveness of tradables

ha is esseial fr grwh. A pside grwh sceari wih higher FDI ad capial lws wld likel eacerbae

hese pressres, which cld be caied b deepeig iscal cslidai b saig par f he addiial

reees, hs brigig ab a acceleraed redci i he erall iscal deici.

Implementing further iscal consolidation will require skillful management in balancing important

infrastructure development and social expenditure needs. Georgia faces important infrastructure

development priorities in the areas of roads, water, and rural development to catalyze private investment andto create the conditions for strong growth in the long run. In addition, social expenditure pressures will be

substantial due to the aging population, the need to improve overall health outcomes, and the need to improve

coverage of the poor while unemployment remains high. Identifying and illustrating the implications of policy

options to balance these competing priorities is the subject of this public expenditure review (PER) for Georgia.

Implemeig frher iscal cslidai i a eirme wih parliamear ad presideial elecis

scheduled for 2012 and 2013, respectively, will require particularly cautious and pragmatic management of

public expenditure priorities.

Fiscal stimulus in 200809 was associated with a substantial rebalancing of the composition of public

expenditures. Scial epedires ad ifrasrcre iesme were scaled p as par f he iscal simls

miigae he impac f he crisis ad sppr ecmic recer. the pesi beei was raised frm GEL

38 per mh i 2007 GEL 70 i 2009 ad cerage ad beeis were als raised fr he argeed scial

4 Eeral pblic deb repames are lwer ad he ahriies hae bil iscal bffers help maage hese bligais.


ExECutIvE SuMMARy |xv

Figure 3. Fiscal Framework Figure 4. Composition of Public Expenditures

in percent of GDP, 200715 in percent of GDP, 200715

Total expenditures Revenues & grants Tax revenues overall fiscal deficit 2007 2008 2009 2010 2011 2012 2013 2014 2015

Source: Georgian authorities and World Bank staff estimates. Source: Georgian authorities and World Bank staff estimates.

2009 2010 2011 2012 2013 2014 2015

40

0

20

10

30

9.2

6.6

3.6 3.5 3 2.7 2

24.423.5

25.4 24.7 24.7 24.7 24.7

29.3 28.3 28.5

27.4 27.3 27.1 26.9

2929.730.3

30.932.1

34.938.4

35

30

0

25

20

15

10

5

Current Expenditure Capital Expenditures

25

30.1

23.321.8

9 8.4 8.9

7.2


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f pressre scial epedires ad his ca be caied b cmbiig limied grwh f he basic beei

with exploring measures to develop private savings for retirement. In addition, improved coverage and targeting

of the TSA and MIP programs can be combined with measures to connect TSA recipients with employment

opportunities and improve access to pharmaceuticals and preventative treatments for the population. Options

for instilling greater selectivity in capital expenditures include further improving the capital budget including

a consistent and comprehensive presentation of public funding for investment, as well as strengthening thebrader capial bdgeig ssems, icldig ssemaizig he prjec ideiicai prcess ad deelpig

mehdlgical gidace fr cs-beei aalsis. opis ehace ssaiabili f he rad iesme

program include a phased-in rebalancing of road expenditures toward maintenance and rehabilitation as

investment in the main East-West highway winds down, along with institutional measures to enhance the

eficiec f rad iesmes.

Social Expenditures

Georgias old-age pension beneit has a large poverty-mitigating impact, but maintaining replacement

rates for all recipients will entail higher iscal costs over time given demographic trends. Georgiaspplai is agig ad relies msl he pblicl fded basic beei fr ld-age icme. this siai

preses a rade-ff: eiher he replaceme rae f he basic pesi beei will erde r is iscal css will

rise sigiical er ime. the pesi beei i Gergia is a la beei paid f geeral reees all

men 65 years of age or older and all women 60 years of age or older, with pension expenditures amounting to

3.3 percent of GDP in 2011. The pension program plays a major role in reducing the incidence of poverty in

Georgia, with simulations indicating that the poverty headcount in 2009 would have been 38.1 percent instead

f 25.7 perce wih he pesi beei. While he pesi beei is -ideed, i has peridicall bee

increased, with the effect that the replacement rate has effectively been maintained at about 13 percent of the

aerage real wage. Pblic epecais make i dificl allw he replaceme rae erde csiderabl

er ime. o he her had, a large e-ime jmp i he beei cld sere raise pblic epecais fr

a higher replacement rate. Figure 6 shows that a large one-time increase, followed by periodic increases to

maiai he higher replaceme rae, cld icrease he iscal cs f pesis er 7 perce f GDP i he


ExECutIvE SuMMARy |xvii

Figure 5. Dependency Ratios in Georgia Figure 6. Pension Costs with Constant ReplacementRate

in dependents per 100 persons of working age in percent of GDP

Total dependency ratio Child dependency ratio Old-age dependency ratio GEL 100 for all GEL 100 + GEL 125 if 67+ Raise female retirement under Scenario 2

GEL 10 0 + GEL 12 5 if


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medim erm. I all scearis where he beei replaceme rae is held csa, he iscal cs rises er ime

because of demographic pressures of an aging population.

Options to manage the pension trade-off include a combination of setting expectations for the replacement

rate at affordable levels and exploring measures to develop voluntary savings for retirement to ease

pressure on the basic beneit. I he shr erm, a large e-ime jmp i he basic beei leads a jmpi iscal css ha ca be caied b seleciel argeig he higher beei, as was de drig he beei

increase that took effect in September 2012. In addition, a mechanism to limit medium term growth of the

basic beei mre ha he rae f ilai cld help se epecais a affrdable leels, while

als precig he prchasig pwer f he beei.5Furthermore, measures to encourage private savings for

reireme ca ease pressre fr ad hc ad ssaiable icreases i he basic pblic beei. Simlais

suggest that combining a basic pension growing at an affordable rate with a supplementary private pension

derived from voluntary savings could stabilize the overall replacement rate for old-age income over time.

The TSA program supports consumption among poor households, but coverage of the poor can improve

further and second generation reforms can help link TSA recipients with job opportunities. TSA

beeiciar hsehlds which mee he crieria f a pr-meas esig frmla receie GEL 30 mhl asa base beei pls GEL 24 fr each addiial hsehld member. I 2011, ard 415,000 idiidals (r

10 percent of the population) received TSA for a total budget of about GEL 150 million (or 0.7 percent of GDP).

Simulations indicate that the poverty headcount would have been 2 percentage points higher in 2009 without

TSA. Compared to other social assistance programs in the region, Georgias TSA is an average performer with

respect to targeting and above average in terms of coverage. Still, over 40 percent of the bottom decile does

not receive TSA, and thus further expanding coverage of the bottom decile remains a key challenge. Another

potential priority going forward is to better link TSA recipients with job opportunities and human capital

iesmes mre bradl. Alhgh here is lile eidece ha tSA discrages beeiciaries frm seekig

wrk, eiher des i aciel help hem id emplme.

5 the pi der csiderai is a mechaism limi grwh f he basic beei over the medium term mre ha he rae f ilai, raherha eplici ideai f he beei. the ahriies csider ha eplici ideai wld redce he leibili f he iscal framewrk b sbjeciga large par f scial epedires shr-erm swigs i he rae f ilai ha ca be affeced b a hs f eges facrs.

xviii| ExECutIvE SuMMARy


Figure 7. Coverage of MIP Figure 8. Government and OOP Health Spendingin ECA

in percent of each decile receiving MIP out of pocket spending as share of total, in percent

Decile government health spending, percent of GDP

2009 2011

Source: UNICEF WMS. Source: WHO and HUES.

50

0

40

30

20

10

1 2 3 4 5 6 7 8 9 10

80

0

60

40

20

10

70

50

30

1 2 3 4 5 6 7 8 9 100

Georgia


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Health spending in Georgia is better targeted to the poor than in many other countries, but challenges

remain in improving health outcomes and inancial protection against impoverishing out-of-pocket

payments. the Medical Israce Prgram, which ffers a cmprehesie package f healh beeis pr

households meeting the proxy-means test criteria, is received by about 900,000 individuals (20 percent of the

population). The MIP budget accounts for about a half of public health expenditures and is the reason why

Georgias health spending is better targeted to the poor than in many other countries. MIP also has a majorimpac i redcig -f-pcke spedig amg beeiciaries. I erms f ke healh secr bjecies,

hweer, healh cmes alg seeral dimesis hae see limied impreme. Ke idicars f iacial

protection against impoverishing out of pocket payments also remain relatively weak in comparison to peer

countries, with low public health spending and high private spending on pharmaceuticals among the key causes

of this pattern. Addressing these challenges will require raising coverage and utilization of medical care. In spite

of the success of the MIP, many low-income households still do not have adequate coverage of health care. In this

ce, he plaed eesi f israce beeis he elderl pplai i 2012 is a welcme sep frward

and can be followed up by expanded coverage of the still uncovered poor households. Part of the problem of

excessive private spending on drugs can be addressed by promoting the use of generics, but it will also require

redcig self-reame b icreasig ilizai ad eedig he pblic drg beei ake adaage f

public purchasing power to reduce drug price markups. Addressing weaknesses in the supply of medical care,with a focus on primary and preventative care, is another important priority in addressing Georgias health

sector challenges.


ExECutIvE SuMMARy |xix

Table 2. Sregheig Capial Bdgeig: Ieraial Pracice i Ideiicai, Preparai, ad Appraisal

Dimension Chile South Korea Ireland United Kingdom

Coverage ofPIM System

Public investmentprojects at all levelsof government and toinvestment proposalsfrom state enterprises

Central governmentprojects and to localgovernment projectsreceiving centralgovernment subsidies

Capital expenditureproposals in the publicsector

Central governmentonly

Prominent assessment

tools

CBA/CEA CBA and MCA Single Criterion

Analysis, MCA and CBA/CEA

CBA/CEA and MCA

Proportionality inapplication of tools.

No Yes Yes No

Requirement forpreliminary assessmentbefore commencingpreparation

Yes Yes for projects>$50 m

Yes Yes

Project screening bycentral agency

Yes but de-concentrated structureof autonomouspricial fices

Yes - No Only for very largeprojects, e.g., roadschemes >500 million

Project selectiondelegated to sector

spending agencies -within budget ceilings

Yes Yes Yes Yes

Involvement of centralagencies other than theinance ministry

Yes Ministry ofPlanning responsible forpre-investment phase

Yes PIMAC organisespreliminary feasibilitystudies for Ministry ofPlanning and Budget.

No No

Central agencies issueguidelines on projectplanning

yes secr speciicguidelines

yes secr speciicguidelines

Yes general guidelines Yes general guidelines

Source: PER Background Note on Strengthening Capital Budgeting in Georgia.Note: CBA cs beei aalsis; CEA cs effecieess aalsis.


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Strengthening Capital Budgeting

Public investment consolidation going forward will require bringing capital budgeting systems in

Georgia closer to international best practices. As noted, a key challenge faced by Georgia is that public

iesme cslidai will hae make a impra cribi iscal cslidai drig 20122015

while at the same time addressing key infrastructure development needs. International experience has shownthat strengthening capital budgeting systems can serve as a key instrument toward achieving greater selectivity

ad impred eficiec i capial epedires. Prgress dae, sppred b he Wrld Baks Deelpme

Policy Operation (DPO) series, largely focused on improved presentation of the capital budget. These reforms

include submission of a capital budget as a consistent annex to the annual budget law, increased coverage

a majri f pblic iesme, he cmplee ime prile f prjec iacial ifrmai, iacial

ifrmai iclde smmar prjec jsiicais, ad mirig ad reprig wih phsical mirig

indicators.

Options going forward to strengthen capital budgeting include both further improving content of

the capital budget, as well as strengthening the broader capital budgeting system. The capital budget

preseai ca beei frm frher imprig iacial ifrmai ad cerage (icldig mre dmesicalliaced prjecs, icldig rgaizaial classiicai, ad demsraig csisec wih igres i he

main budget. A key priority here is to achieve a comprehensive and consistent presentation of public funding

for investment. While this can include investment undertaken by state owned enterprises (SOEs), it would need

to clarify the separation of the governments balance sheet from that of SOEs. At present, there are several

different sources of information on public investment that are not fully consistent, including the increase in

iacial asses i bdge, he liss f prjecs i bdge, he capial bdge ae cerig primaril dr

funded projects, the Basic Data and Directions (BDD) document, and investments through on-lending to SOEs.

Options in strengthening the broader capital budgeting system in Georgia include systematizing the

project identiication process and developing methodological guidelines for cost-beneit analysis. There

are many positive features of Georgias current approach to budgeting for capital expenditure, including a

clear sense of infrastructure priorities, a disciplined budget process as set out in the Budget Code, improving

procurement with open and competitive bidding, and adequate internal control and reporting mechanisms. On

he egaie side, iied aial prcedres fr prjec ideiicai, preparai ad appraisal are missig,

and there is no explicit calendar linking activities in the project cycle to the budgeting and strategic planning

cycles. This suggests that any reinforcement Georgias capital budgeting system should focus on upstream

elements that emphasize moving away from ad hoc decision-making and informality to a system with procedurally

deermied decisi-pis, a ficial caledar, ad sd gidace aalical mehds. I his ce,

a ssemaic prjec ideiicai prcess wih a prelimiar prjec assessme sep cld sere scree

prjecs befre he eer he preparai sage. Prjec ideiicai wld bes be crdiaed wih earl

stages of BDD process (before budgetary ceilings are set). Furthermore, developing national methodologicalgidace cs-beei aalsis fr se b majr prjecs ha hae passed ideiicai wld pride a

ifrm se f crieria fr prjec appraisal ad ealai acrss secrs ad regardless f srce f iacig.6

6 An important consideration in designing reinforcements to the broader capital budgeting system is to ensure that the procedures are simple and light,so that the impact on time and cost of project preparation and implementation are minimized. These reinforcements can also be phased in over time.

xx| ExECutIvE SuMMARy



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Road Sector Investment

Georgia faces signiicant road improvement needs and investment has accordingly increased

signiicantly in recent years, but there is room to improve the sustainability of the overall road investment

program. Improvement of the road network is critical to Georgias development priorities, including higher

competitiveness through better connectivity with regional and international markets, developing Georgiaspotential as a regional transit and logistics hub,

and enhancing rural access to markets, education,

and health. In meeting these priorities, road

iesme has icreased sigiical i rece

years and the Government has made much

progress toward upgrading infrastructure and

attaining international standards of serviceability.

A key objective has been to upgrade the East-

West highway, with the result that the condition

of the international road network has improved

markedly from 34 percent in good or fair conditionin 2004 to 76 percent in 2010. On the other hand,

the majority of secondary and local roads remain in

poor condition, with only 30 percent of secondary

roads and 15 percent of local roads in good to fair

condition in 2010. Furthermore, while routine

and periodic maintenance expenditures have

increased in recent years, they remain inadequate

and thus add to the long run costs of developing

the road network.

An important option for improving the long run sustainability of the road investment program is for the

budget to include provisions for adequate levels of periodic and routine maintenance. In 2010, actual

periodic and routine maintenance expenditure amounted to GEL 32 million. In contrast, the estimated periodic


ExECutIvE SuMMARy |xxi

Table 3. Road Network in Georgia in InternationalContext

Road Km/1,000 sq km

Road Km/1,000 people

Azerbaijan 288 2.9

Kyrgyzstan 170 6.3

Kazakhstan 40 7.1

Georgia 291 4.57

Estonia 1320 41.2

Hungary 1733 15.7

FYR of Macedonia 342 4.3

Serbia & Montenegro 494 4.8

Slovenia 1007 10.2

Albania 657 3.5

Europe and Central Asia 580 8.6

Upper Middle Income 1076 9.2

Lower Income 328 4.9

Source: WDI and IEF data bases.

Figure 9. Road Network in Georgia Over Time

in share of respective network

International Road Network Condition Secondary Road Network Condition

Good Fair Poor Bad Good Fair Poor Bad

Source: Roads Department of Georgia, WDI, and IEF data b ases.

2009 2004

80

13

4 3

34

23

18

25

2009 2004

26

12

8

54

6

11 13

70


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maintenance need was GEL 123 million and the estimated routine maintenance need was GEL 43 million. Such

der-prisi f maieace epedire resls i prgressie deerirai i cdii f a sigiica

part of road network and increases long run costs of maintaining and upgrading the road network. Neglecting

maintenance also results in higher economic costs in the form of increased vehicle operating costs. Adequate

provision of maintenance expenditures is thus an important option for consideration. At the same time, it

shld be ed ha sice maieace is msl iaced frm dmesic resrces while iesme is msliaced frm eeral resrces, he relaie allcai is affeced b he aailabili f resrces frm dmesic

and external sources.

A second option in improving long run sustainability of road investment is to phase in a rebalancing of

outlays for new construction and rehabilitation over time in order to reduce backlog of the network in

poor condition. This can involve incrementally introducing a program of rehabilitation and maintenance of the

large and neglected secondary and local road network, so that road sector priorities balance capacity expansion

with adequate emphasis on preservation and improvement. Rehabilitation expenditures have increased in

recent years but remain below levels recommended by the HDM (Highway Development and Management)

mdel. Frhermre, he ecmic rae f rer f rehabiliai (~2035%) is picall sigiical greaer

than that of capacity expansion (~1014%) through, for example, widening. With the large, high-priorityinvestment in the East-West Highway continuing for the next few years, these recommendation can be planned

to be phased in over a period of time.

A third option in enhancing road investment sustainability is to implement a range of eficiency-

enhancing institutional measures. These measures can include: (i) moving toward the implementation of a

cmprehesie Rad Asse Maageme Ssem (RAMS); (ii) irdcig ad epadig he se f mre eficie

contracting mechanisms like, Design-Build and Performance-based contracting based on Design-Build-Operate-

Maintain and Transfer (DBOMT) principles; (iii) developing and implementing a viable system for attending

he eeds f lcal rads; ad (i) imprig Rad Deparme capaci assess rehabiliai beeis,

icldig mli-crieria assessme wih freigh, eficie ehicle rig, safe, access fr idsr, beei-

cost ratio (BCR), community access to essential services, emergency access, environmental sustainability, and

agency risk.

Structure of Report

the res f his shesis repr is i ie chapers. Chaper 1 smmarizes he macrecmic ce ad

assesses trade-offs associated in balancing the overall composition of public expenditures. The second and third

chapters illustrate policy options and implications associated with containing social expenditure pressures and

improving effectiveness of health expenditures, respectively. Chapter 4 reviews the international experience in

sregheig capial bdgeig ad prides pis fr csiderai fr Gergia. the ifh chaper discssesoptions associated with rebalancing road sector expenditures.

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Chapter 1. Macroeconomic Context andExpenditure Composition

1.1. Introduction

Georgia faces dual macroeconomic challenges of generating rapid growth with sustainability in an

uncertain global environment and addressing both will require continued implementation and potential

deepening of the iscal consolidation program. o ssaiabili, he crre acc deici has arrwed

by about half from a peak of 21.8 percent of GDP in 2008 but remains among the highest in the ECA region at

11.8 percent of GDP in 2011. Georgia also faces external debt repayment obligations of about 5 percent of GDP

per year during 201214 and total external debt was relatively high at 58 percent of GDP in 2011.7The global

economic outlook remains uncertain and a more widespread downturn could adversely impact exports, FDI,ad her capial ilws. o grwh, he ecm has rebded srgl b 6.7 perce drig 201011,

although investment remains lower than pre-crisis levels and higher investment without further widening the

crre acc deici will reqire raisig lw leels f aial saigs. the epr share f GDP remais lw

and an appreciating real exchange rate does not help encourage a shift in the drivers of growth toward the

radable secrs. Gie hese challeges, cied implemeai f he iscal cslidai prgram wld

creae addiial space fr iscal respse sharp glbal shck ad frher blser deb ssaiabili. I he

ee f a pside grwh sceari wih higher FDI ad her capial lws, aial saigs cld erde frher,

he crre acc deici cld wide, ad he RER cld appreciae frher. I his ee, hese pressres

cld be cered b deepeig iscal cslidai hrgh a mre acceleraed redci i he pah f he

erall iscal deici. If he iscal cslidai prgram ges ff rack, Gergia ca qickl rer he pre-

crisis imbalaces f large crre acc deicis ad ssaiable grwh drie b radables.

Continued implementation of iscal consolidation will require managing a growing body of competing

social and infrastructure expenditure pressures in an environment where opportunities to extract iscal

space from other areas has diminished. The composition of expenditures has shifted considerably in the

years since the crisis. Important social protection, health, and infrastructure expenditures have been scaled up

wih iscal space cmig frm a redci f defese ad ieral secri epedires. the ppriies fr

geeraig iscal space frm frher epedire redcis i defese ad ieral secri hae dimiished.

Going forward, Georgia faces further important infrastructure development needs in the areas of roads, regional

development, water, energy, and agriculture. Social expenditure pressures come from needs on multiple fronts,

including providing adequate pensions to an aging population, improving social assistance coverage of the poor,ad imprig healh cmes. Maagig hese cmpeig eeds wihi he ce f he iscal cslidai

prgram is a ke pblic iace challege facig Gergia. Bechmarkig agais regial cmparars shws

that Georgia spends a greater share of total outlays on capital expenditures and a lesser share on education,

health, and social protection. Expenditure consolidation to date has also emphasized current spending. All this

suggests that capital expenditures can make a greater contribution to adjustment going forward.

7 Eeral pblic deb repames are lwer ad he ahriies hae bil iscal bffers help maage hese bligais.


CHAPtER 1. MACRoEConoMIC ContExt AnD ExPEnDItuRE CoMPoSItIon |1


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In order to address the challenges facing the macroeconomic framework and the composition of

expenditures, this chapter discusses the following options for consideration:

Maiai disciplie i implemeig he iscal cslidai prgram b redcig he erall iscal deici

from 3.6 percent of GDP in 2011 to 2 percent by 2015, through a further consolidation of expenditures by

3 percentage points of GDP by 2015

I he ee f a pside grwh sceari deriig frm higher FDI ad capial ilws, deepe iscal

cslidai b saig par f he addiial reees ad blserig iscal bffers

Enable capital expenditures to make a contribution to expenditure consolidation going forward, particularly

as private investment picks up

Manage expenditure consolidation by instilling greater selectivity in capital expenditures, containing

medium term social expenditure pressures, and enhancing sustainability of road investment program

(greater detail on each in subsequent sector chapters)

The structure of this chapter is as follows. the irs seci eplres he macrecmic challeges facig

Georgia on two fronts: sustainability and growth. The section establishes the case for why sustaining and

peiall deepeig iscal cslidai is impra address hese challeges. the secd seci eplres

how the composition of expenditures has evolved in Georgia over time. This helps shed light at a broad level

hw Gergia ca balace epedire eeds i cmpeig areas i rder sccessfll adhere he iscal

consolidation program.

1.2. Macroeconomic Context: Why is Fiscal Consolidation so Important?

Georgia has succeeded in generating strong growth with declining public debt, with iscal stimulus in

2008-09 being followed by adjustment in 201011. Far-reaching reforms following the Rose Revolution,

along with a favorable external environment, helped stimulate foreign direct investment (FDI) and accelerate

economic growth in Georgia. Growth averaged 9.3 percent per year during 200407 and after a crisis-related

dwr, rebded agai 6.7 perce drig 201011. the eeral pblic deb rai declied sigiical

during 200407 as reforms to streamline the tax regime and root out corruption resulted in considerably higher

a reees. As germe brrwig icreased iace a iscal simls drig he 200809 crisis, eeral

pblic deb icreased befre begiig declie agai i 2011. the erall iscal deici rse 9.2 perce f

GDP i 2009 befre iscal adjsme helped lwer he deici 3.6 perce i 2011.

Addressing remaining challenges in narrowing the current account deicit and growing the tradable

sector in an uncertain global environment will require continued implementation of the iscal

consolidation program. Gergias eeral crre acc deici remaied amg he highes i he ECA

region in 2011 at 11.8 percent of GDP, thus raising concerns about sustainability. External debt repayments in

201214 remain considerable and a sharper global economic downturn could impact Georgias exports, FDI, and

iacig css. I his ce, cied implemeai f he iscal cslidai prgram prides a ke

achr f ssaiabili b creaig space fr a iscal respse glbal shcks ad faciliaig frher redci

2| CHAPtER 1. MACRoEConoMIC ContExt AnD ExPEnDItuRE CoMPoSItIon



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in the path of public debt. Generating rapid growth in Georgia will also require engineering a shift in the growth

mdel ward e iaced mre f dmesic saigs ad drie mre b he radable secrs. naial

savings at 14 percent of GDP in 2011 remains too low to sustain the investment necessary for rapid growth.

With exports at 36.6 percent of GDP in 2011, the tradable sectors have played a much smaller role in driving

growth in Georgia than in regional and global comparators. Fiscal consolidation is important in addressing

the growth challenge to prevent further erosion of national savings and contain further real exchange rateappreciai pressres. Gie he lw appeie fr higher a raes ad he high prdcii f cllecis, iscal

consolidation will need to rely on further expenditure consolidation. In the event of an upside growth scenario

idced b higher FDI ad her capial lws, saig par f he addiial reees realized ca pree a

return to the large macroeconomic imbalances of the pre-crisis period.

Pre-crisis Developments, 200407

Georgia experienced strong growth from 2004 through mid-2008 facilitated by far-reaching reforms

and large foreign direct investment (FDI) inlows. Following the Rose Revolution at end-2003, reforms were

derake sreghe pblic iaces, impre he bsiess eirme, pgrade ifrasrcre serices,

liberalize trade, and improve social services. As a result of the reforms and a favorable global environment,

economic growth averaged 9.3 percent per year during 200407. A key driver of this growth was substantial

ilws f FDI, which icreased frm $331 milli (8.3 perce f GDP) i 2003 $1.67 billi (16.4 perce f

GDP) in 2007.

Growth during 200407 was associated with a signiicant widening of the current account deicit.Exports remained around 3134 percent of GDP during 200407, suggesting that growth during this period

was not associated with a substantial expansion of the export and tradable sectors. On the other hand, the large

capial ilws, alg wih rapid credi grwh, feled a epasi f imprs. Aggregae demad was drie i

large part by the growth of consumption, particularly rapidly growing government consumption. Consequently,

he eeral crre acc deici wideed frm 7 perce f GDP i 2004 21.8 perce b 2008, raisig

concerns about sustainability. The real exchange rate appreciated by about 40 percent between 2004 to mid-

2008, thus impacting the competitiveness of tradables. Gross national savings fell from 25 percent of GDP in



Figure 1.1. GDP Growth, Exports, and Imports Figure 1.2. CA Deici, Iesme, FDI, Saigs

GDP growth, in percent exports, imports, in percent of GDP in percent of GDP

GDP growth Imports (rhs) Exports (rhs) CA deficit Investment FDI Inflws National savings

Source: Georgian authorities and WB staff estimates. Source: Georgian authorities and WB staff estimates.

14

-4

10

6

2

-2

12

8

4

0

70

-20

50

30

10

-10

60

40

20

0

2001 2004 2005 2006 2007 2009 20112008 20102002 2003

35

30

0

25

20

15

10

5

2001 2004 2005 2006 2007 2009 20112008 20102002 2003


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2004 12.4 perce i 2007 ad 3.3 perce i 2008, hs shifig he brde f iacig iesme ad

grwh largel freig capial ilws.

Tax reforms were highly successful in raising revenue, while lowering rates and streamlining

administration. The tax regime was streamlined by reducing both the number of taxes and key tax rates. As a

result, tax revenues increased from 14.6 percent of GDP in 2003 to 25.8 percent in 2007. Together with nontaxrevenues and grants, total revenues increased from 16 to 29.3 percent of GDP during this period. The number of

taxes was reduced from 21 in 2004 to 7 in 2005 and tax rates were reduced across the board. At the same time,

the tax base was broadened by eliminating several exemptions and special regimes. These tax policy reforms

were supported by key institutional reforms to strengthen tax and customs administration and enforcement.

Large mbers f a ad csms ficials were dismissed ad ew saff was hired wih higher wages, raiig,

ad ceriicai ess. new rles reifrced prfessial behair ad deerred crrpi b impsig seere

penalties for misconduct and introducing bonuses for reporting fraud and corruption.

The public debt ratio declined during 200407 as higher revenues and privatization proceeds more

than fully inanced a substantial increase in public expenditures. Along with the rise in tax revenues, total

public expenditures increased more than proportionally from 17.5 percent of GDP in 2003 to 34 percent in2007. As a resl, he erall iscal deici icreased frm 1.5 perce f GDP i 2003 4.7 perce i 2007, b

was iaced hrgh higher priaizai receips which amed 5.2 perce f GDP i 2007. Wih he

deici fll iaced frm crre prceeds, srg ecmic grwh led sead impreme i pblic deb

burden indicators. External public debt declined from 45 percent of GDP in 2003 to 16.8 percent in 2007. On the

other hand, private external debt increased considerably from 5.5 percent of GDP in 2003 to 21 percent in 2007

as he crprae ad iacial secr k adaage f aailable freig capial fr heir medim ad lg erm,

as well as short term, borrowing needs.

Crisis and Response

The shocks from the August 2008 conlict and the global inancial crisis resulted in a sharp downturn in

economic growth and adjustment of the current account deicit. The double shocks led to deterioration in

iesr ad csmer cidece, craci i FDI, eprs, ad remiaces, ad a cback i bak ledig.

The economy grew by 2.3 percent in 2008 and contracted by 3.8 percent in 2009, which was a sharp slowdown

frm grwh i ecess f 9 perce drig he precedig fr ears. FDI ilws cllapsed frm $1.67 billi

(16.4 percent of GDP) in 2007 to $658 million (6.1 percent of GDP) in 2009, while exports fell from 31 percent

f GDP i 2007 29.8 perce i 2009. Wih he fall i FDI ad her priae ilws, he crre acc deici

adjusted from 21.8 percent of GDP in 2008 to 10.6 percent in 2009 as imports fell by 10 percentage points of

GDP in 2009. The large international crisis assistance package to Georgia enabled it to avert the even sharper

adjsmes eperieced b her ECA cries wih eqall large crre acc deicis he ee f hecrisis. As consumption was smoothed somewhat in the face of falling incomes, national savings plummeted from

12.4 percent of GDP in 2007 to 2.4 percent in 2009.

As the authorities responded with a iscal stimulus to mitigate the downturn and restore conidence,

the iscal deicit and public debt ratio increased during 200809. Public expenditures increased from

34 percent of GDP in 2007 to 38.4 percent in 2009, while tax revenues declined from 25.8 percent of GDP

i 2007 24.4 perce i 2009. As a resl, he iscal deici wideed frm 4.7 perce f GDP i 2007

9.2 perce i 2009. the higher iscal deicis were iaced primaril hrgh icreased dr sppr, wih he




29/128



Table1.1.

Georgia:SelectedEconomicIndicators,2

0032011

inpercentofGDP,exceptwherenoted

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012p

201

3p

2014p

2015p

GNIpercapita(US$,atlasme

thod)

860

1,050

1,3

20

1,6

80

2,0

90

2,4

60

2,5

40

2,7

00

2,8

80

3,0

50

3,220

3,4

00

3,5

90

UnemploymentRate

11.5

12

.6

13.8

13.6

13.3

16.5

16.9

16.3

15.8

15.3

14

.8

14.3

13.8

GDPGrowthRate

11.1

5

.9

9.6

9.4

12.3

2.3

-3.8

6.3

7.0

6.5

5

.5

5.5

5.5

CPI(e.o.p.)

7.0

7

.5

6.2

8.8

11.0

5.5

3.0

11.2

2.0

5.0

6

.0

6.0

6.0

Investment(%GDP)

31.3

31

.9

33.5

30.9

32.1

26.0

13.0

21.6

25.7

25.6

24

.2

23.7

23.7

GrossNationalSavings(%GD

P)

21.7

25

.0

22.4

15.7

12.4

3.3

2.4

11.3

14.0

13.0

13

.0

14.7

15.9

percentofGDP

,exceptwherenoted

Fiscal

RevenuesandGrants

16.0

23

.1

24.2

26.8

29.3

30.7

29.3

28.3

28.5

27.4

27

.3

27.1

26.9

TaxRevenues

14.6

19

.7

20.8

22.8

25.8

24.9

24.4

23.5

25.4

24.7

24

.7

24.7

24.7

ExpenditureandNetLend

ing

17.5

20

.7

26.0

29.8

34.0

37.0

38.4

34.9

32.1

30.9

30

.3

29.7

29.0

CurrentExpenditure

14.7

15

.8

20.1

22.2

25.0

28.5

30.1

26.0

23.3

22.5

22

.3

22.1

21.8

CapitalExpenditureandN

etLending

2.8

4

.9

5.9

7.6

9.0

8.6

8.4

8.8

8.9

8.4

8

.0

7.6

7.2

OverallFiscalBalance

-1.5

2

.4

-1.8

-3.0

-4.7

-6.3

-9.2

-6.6

-3.6

-3.5

-3

.0

-2.7

-2.1

PrivatizationReceipts

0.4

0

.7

3.6

5.2

5.2

3.7

2.0

1.1

1.6

0.5

0

.2

0.2

0.2

External

ExternalCurrentAccount

Balance

-9.6

-6

.9

-11.1

-15.1

-19.7

-21.9

-10.6

-10.3

-11.8

-12.6

-11.2

-9.0

-7.8

ExportsofGoodsandServ

ices

32.3

32

.1

34.1

32.8

31.1

28.7

29.8

34.9

36.6

39.2

42.2

46.5

50.2

ImportsofGoodsandServices

46.7

48

.6

51.8

56.8

57.9

58.3

48.9

52.7

55.4

56.5

57.7

59.0

60.5

FDIInflws(%G

DP)

8.3

9

.4

8.5

15.3

16.4

11.8

6.1

7.0

6.8

6.1

6.0

6.0

6.0

FDIInflws(MuS$)

331

483

542

1,1

86

1,6

75

1,5

23

658

817

973

964

1,032

1,0

95

1,1

90

IntlReserves(MoofImptsofG&S)

1.2

1

.8

1.7

2.4

2.8

2.4

4.8

4.4

4.3

3.6

3.1

2.9

2.8

IntlReserves(MUS$)

191

383

474

881

1,3

61

1,4

80

2,1

11

2,2

65

2,8

18

2,7

34

2,528

2,5

90

2,7

52

Debt E

xternalPublicDebt1/

44.9

34

.5

26.6

21.9

17.5

20.9

31.4

33.6

29.0

27.7

25.3

24.2

23.2

TotalPublicDebt

55.2

43

.6

34.0

27.9

22.3

25.0

37.0

39.1

33.9

32.7

30.9

30.1

29.4

ExternalPrivateDebt

5

.5

5.6

15.9

21.0

23.1

26.6

28.2

28.8

26.9

26.3

25.9

23.8

TotalExternalDebt

40

.0

32.3

37.9

38.5

44.0

58.0

61.8

58.1

54.5

51.6

50.1

47.0

Source:GeorgianauthoritiesandWorldBankstaffestimates.

Notes:p=projected;1/publicandpubliclygu

aranteed


30/128

international community pledging $4.5 billion in post-crisis assistance to Georgia over three years, in addition

to a $1.15 billion IMF Standby Arrangement. As a result, external public debt increased from 16.8 percent of

GDP in 2007 to 31.4 percent in 2009.

Economic Rebound and Fiscal Adjustment

Economic growth rebounded strongly by 6.7 percent in 201011, supported by public investment,

strengthening conidence, and a rebound in both merchandise and services exports. The economy

rebounded by 6.3 percent in 2010 and 7 percent in 2011. Participation by sectors in the rebound was broad

based, wih mafacrig ad serices makig pariclarl srg cribis. the recer beeied frm

a pickup in exports, tourism, bank lending, and continued high levels of public investment. The rebound in both

merchandise and services exports have played a major role in the economic recovery. Exports of goods and

services were up to 36.6 percent of GDP in 2011 from 29.8 percent in 2009. Merchandise exports (up 39 percent

per year in 201011) were composed primarily of metals and metal products, repaired and remanufactured

vehicles, wines and beverages, fertilizers, and fruits and nuts (together accounting for about 60 percent).

the serices secr beeied frm igrs epasi i ris arrials ad grwh i rasi rade hrgh

Georgia. The number of tourists increased by 37 percent per year in 201011, with the bulk of visitors from

Armenia, Azerbaijan, Turkey, and Ukraine. Azerbaijan and Armenia accounted for the bulk of transit trade

through Georgia, with proceeds from exports of transport services up 13 percent per year in 201011.

The current account deicit widened to 11.8 percent of GDP in 2011, driven by strong growth of importsand higher capital inlows. Imports grew strongly by 34.5 percent in 2011, driven by higher food and oil prices,

as well as higher demand from improved economic performance. FDI remained stable at about 6.8 percent of

GDP i 2011, while her priae ilws icreased, ms abl -reside depsis i he bakig secr

as well as shr erm brrwig b baks. oficial brrwig als cribed iacig he crre acc

deici.

The authorities have implemented iscal adjustment in 201011 as recovery has taken hold. As the

ecm rebded i 201011, iscal adjsme was implemeed primaril hrgh he cslidai f



Figure 1.3. Fiscal Framework Figure 1.4. Fiscal Framework

in percent of GDP, 200311 real 2010 Lari, millions

Total expenditures Revenues & grants Tax revenues overall fiscal deficit Total expenditures Revenues & grants Tax revenues Current expenditure

Capital expenditures


2003 2004 2005 2006 2007 2009 20112008 2010

40

30

0

25

20

15

10

5

35

17.5

23.1

26

29.7

34

37 38.4

34.9

32.1

1.5 1.6 3

4.76.3

9.2

6.6

3.6

14.6

19.7 20.8

22.9

25.8 24.9 24.4 23.5 25.4

16

20.724.4

26.7

29.3 30.7

29.328.3 28.5

2003 2004 2005 2006 2007 2009 20112008 2010

8,000

0

6,000

4,000

2,000

1,000

7,000

5,000

3,000

394

950

1,582 1,777 1,740 1,634

1,834 1,961

725


31/128

current expenditures. Capital expenditures were maintained at 8.59 percent of GDP as private investment and

FDI remained weak. Total expenditures declined from 38.4 percent of GDP in 2009 to 32.1 percent in 2011. As

a resl, he erall iscal deici declied frm 9.2 perce f GDP i 2009 3.6 perce i 2011. ta reees

edged p frm 24.4 perce f GDP i 2009 25.4 perce i 2011, alhgh his beeied frm e-ff iems

collected in 2011. With a decline in non-tax revenues and grants, total revenues declined from 29.3 percent of

GDP in 2009 to 28.5 percent in 2011.

External public debt declined to 29 percent of GDP in 2011 after peaking at 33.6 percent in 2010. The

ahriies hae iaced he iscal deici msl hrgh ccessial eeral brrwig ad small lmes

f dmesic t-bill issaces. As he iscal deici has arrwed ad he grwh rebd has bee ssaied,

external public debt declined to 29 percent of GDP in 2011. New T-bill issuances amounted to only GEL 91 million

in 2011, compared to GEL 260 million in 2009 and GEL 172 million in 2010. Consequently, total public debt also

declined to 34.3 percent of GDP in 2011 from 39.3 percent in 2010. While private external debt has increased

by about $ 550 million in 201011, the growth of nominal GDP has meant that private external debt edged up

only slightly to 28.8 percent of GDP in 2011 from 28.2 percent in 2010. As a result, total external debt declined

to 58.1 percent of GDP in 2011 from a peak of 62 percent in 2010.

Challenges

With external exposure signiicant in Georgia, continued implementation of iscal consolidation provides

the key anchor of sustainability in an increasingly uncertain global economic environment. Georgias

crre acc deici is amg he highes i he ECA regi a 11.8 perce f GDP i 2011. the aerage CAD

for non-oil ECA countries was about 5.5 percent of GDP in 2011, with only Albania, Armenia, and Belarus having

CADs that were similar in order of magnitude to that of Georgia. This leaves Georgia particularly exposed to a

broader global economic shock. While economic activity in Georgia has not yet been impacted by the evolving

euro-zone crisis, a broader global downturn affecting Georgias main economic partners would likely affect



Table 1.2. Georgia: External Financing 200715

in percent of GDP

2007 2008 2009 2010 2011* 2012p 2013p 2014p 2015p

Financing Needs

Crre Acc Deici -19.7 -21.9 -10.6 -10.3 -11.8 -12.5 -11.2 -9.0 -7.8

Repayment of MLT Debt -2.6 -2.8 -4.7 -3.9 -4.0 -4.8 -5.9 -5.0 -4.0

Total Financing Requirement -22.3 -24.8 -15.4 -14.2 -15.8 -17.3 -17.2 -14.0 -11.8

Financing Sources

Pblic Secr lws 1.3 6.2 8.1 5.1 3.5 4.0 2.2 1.9 1.4

Foreign Direct Investment 17.1 12.2 6.1 7.0 6.8 5.9 6.1 6.0 5.9

Private Sector MLT Borrowing 8.3 5.9 5.3 3.4 4.8 4.0 4.3 4.1 3.9

oher Priae lws -0.8 -0.2 -0.2 -1.8 3.8 3.3 3.2 1.9 1.6

IMF 0.4 2.0 3.2 2.6 0.0 0.0 0.0 0.0 0.0

Adjustments -0.3 -0.3 -1.4 -0.3 0.8 0.0 0.0 0.0 0.0

Use of Reserves -3.7 -1.0 -5.7 -1.8 -4.0 0.2 1.4 0.1 -1.1

Total Financing Sources 22.3 24.8 15.4 14.2 15.8 17.3 17.2 14.0 11.8

Source: Georgian authorities and WB/IMF staff estimates.Note: *=preliminary; p=projections


32/128

is eprs, rism ilws, FDI, ad iacig css. Cied implemeai f iscal cslidai while

he grwh lk remais srg is impra creae space fr a iscal plic respse i he ee f

a downturn. The East Asian experience also offers lessons for Georgia in this regard. The ECA region itself

offers a sharp contrast to East Asia where current account surpluses have been maintained on average following

he iacial crisis f 1997. the 1997 crisis led ma Asia germes csiderabl ighe germe

bdges, i addii bildig large resere bffers ad ighl sperisig baks ad iace cmpaies.

Georgia also faces external debt repayment obligations of about 5 percent of GDP per year during 2012

14. While he sccessfl reiacig f Gergias Erbd i April 2011 helped smh is pblic deb

repame schedle, al pblic ad priae repame bligais remai sigiica a ab $2.5 billi fr

201214 or about 5 percent of GDP per year. Total repayments due to the IMF during this period amount to about

$885 milli. Wih he crre acc deici prjeced aerage ard 8.7 perce f GDP drig 201214,

Gergias eeral iacig eeds drig his perid aerage ab 14 perce f GDP per ear. the iacig

pla relies cied pblic secr lws (3.2 perce f GDP), FDI (6 perce f GDP), her priae capial

ilws (4.9 perce f GDP), ad he se f ieraial reseres (0.4 perce f GDP). I a eirme

f cerai glbal capial lws, ssaiig ad peiall deepeig iscal cslidai wld pride

additional space for meeting repayment obligations in 201214 and serve as a key anchor of sustainability.

Fiscal consolidation is also important for sustaining strong economic growth in Georgia. Strong and

ssaied ecmic grwh will reqire egieerig a shif i he grwh mdel awa frm e iaced b

ilws ad drie b radables ad ward e iaced mre b dmesic saigs ad drie b radables.

Iesme a 25.7 perce f GDP i 2011 remais sigiical belw pre-crisis leels (32 perce i 2007).

Fiacig higher iesme wih wideig he crre acc deici will reqire higher aial saigs,

which remained low at 14 percent of GDP in 2011. Although public savings recovered to 5.2 percent of GDP in

2011, it still remains below the pre-crisis peak of 7.3 percent in 2004, and can serve to further bolster national

saigs i a eirme where priae saigs remais belw leels eeded iace srg iesme

ad grwh. Bed he iacig f higher iesme, ssaiig rapid ecmic grwh will als reqire

a shift toward higher private investment in tradables. Private investment amounted to only 16.8 percent of

GDP in 2011, with public investment in mostly infrastructure adding another 9 percent of GDP. The export

share remains low at 37 percent and the real exchange rate appreciated by about 16 percent since July 2010.

Ssaiig ad peiall deepeig iscal cslidai is esseial cai real echage rae appreciai



Figure 1.5. National, Public, and Private Savings Figure 1.6. Real Effective Exchange Rate

in percent of GDP Dec 1995=100

National savings Public savings Private savings


25

-5

0

20

15

10

5

2003 2004 2005 2006 2007 2009 20112008 2010

135

85

115

105

95

90

120

125

130

110

100

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11


33/128

pressures and engineer a shift toward higher private investment in tradables as part of a strategy to generate

sustained and rapid economic growth in Georgia.

Fiscal consolidation going forward will have to rely on further expenditure consolidation. The

Germes medim erm iscal framewrk prjecs a redci i he erall iscal deici 2.1 perce f

GDP by 2015 from 3.6 percent in 2011. Total revenues are projected to decline to 26.9 percent of GDP by 2015from 28.5 percent in 2011 due to a winding down of grants, non-tax revenues, and one-off tax settlements. Given

tax rates, collections are quite high in Georgia and exemptions are few, so that the room for further increasing

the productivity of collections is limited. Furthermore, the appetite for higher tax rates is low and restricted

somewhat by the provisions of the Economic Liberty Act. Expenditure consolidation will, therefore, need to

make a greaer ha e-fr-e cribi he redci f he iscal deici gig frward, wih he ms

recel appred medim erm iscal framewrk prjecig a declie i al epedires frm 32.1 perce

of GDP in 2011 to 29.0 percent by 2015.

Deepening iscal consolidation will be particularly important in the event of an upside scenario with

higher FDI and capital inlows. Preventing a return to the large macroeconomic imbalances of pre-crisis

perid is a impra priri. I he ee f a pside sceari wih higher FDI ad capial ilws, he realechage rae cld appreciae frher, imprs cld epad, ad he crre acc deici cld wide. I

sch a sceari, acceleraig iscal adjsme b saig raher ha spedig par f he addiial reees

can be important in preventing a return to the pre-crisis imbalances.

1.3. Expenditure Composition

Maintaining and potentially deepening iscal consolidation will require skillful management in

balancing and prioritizing expenditure needs in different areas. Georgia faces substantial social expenditure

pressures arising from its aging population, the need to improve overall health outcomes, and the need to

improve social assistance coverage of the poor while unemployment remains high. In addition, infrastructure

development priorities are substantial in the areas of roads, water, and rural development, in order to catalyze

private investment and to create the conditions for strong growth in the long run. Balancing and prioritizing

these competing expenditure needs, while identifying expenditure savings from other areas, is at the heart of

cied implemeai f he iscal cslidai prgram. Achieig hese bjecies i a eirme

with parliamentary and presidential elections scheduled for 2012 and 2013, respectively, will require skillful

management of public expenditure priorities.

The composition of public expenditures has evolved considerably in three stages since 2004. In thepre-crisis period (200407), as the new government moved to restore and reinforce essential functions of the

state, public expenditures increased across the board, with particularly sharp increases in national and internal

security spending, but also including increases in social expenditures and basic infrastructure investments.

As he ahriies implemeed a cercclical iscal simls (200809) fllwig he wi shcks f he

Ags 2008 clic ad he glbal iacial crisis, he cmpsii f epedires derwe a marked shif.

Select social and capital expenditures were scaled up to mitigate the impact on the poor and vulnerable and

sppr iesme ad ecmic grwh, while iscal space was geeraed hrgh a marked redci

i defese, ieral secri epedires, ad her recrre. Wih ecmic recer akig hld, iscal




34/12810| CHAPtER 1. MACRoEConoMIC ContExt AnD ExPEnDItuRE CoMPoSItIon


Table1.3.

Georgia:CompositionofMediumTermExpenditure

Framework(201115)

2003

2004

2

005

2006

2007

2008

2009

2010

2011

2012p

2013p

2014p

2015p

percento

fGDP

Revenues&Grants

16.0

23.1

2

4.4

26.7

29.3

30.7

29

.3

28.3

28.5

27.4

27.3

27.1

26.9

TaxRevenues

14.6

19.7

2

0.8

22.9

25.8

24.9

24

.4

23.5

25.4

24.7

24.7

24.7

24.7

Grants

0.6

1.3

0.9

1.2

0.6

3.2

2

.2

2.3

0.9

0.9

0.9

0.6

0.4

Otherrevenues

0.8

2.1

2.8

2.6

2.8

2.5

2

.7

2.5

2.1

1.7

1.7

1.7

1.7

TotalExpenditures

17.5

20.7

2

6.0

29.7

34.0

37.0

38

.4

34.9

32.1

30.9

30.3

29.7

29.0

Currentexpenditure

14.7

15.8

2

0.1

20.7

25.0

28.5

30

.1

26.0

23.3

22.5

22.3

22.1

21.8

Wages&Salaries

3.4

4.2

4.7

4.1

4.0

5.3

5

.8

5.5

4.7

4.6

4.5

4.5

4.5

Goods&Services

3.6

3.3

4.9

5.6

9.3

8.4

6

.1

managing expenditures pressures for sustainability and growth

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