Donor’s Conference June 2004 Ministry of Finance Establishment of financial order and Action Plan in the fiscal area

Macro-economic performance 2003 The 2003 performance shows mixed picture:  Growth of GDP: 8.6% (in real terms)  Inflation increased to 7%  Balance of Payments deficit deteriorated by 2%  US$ 51 million arrears accumulated

Medium-term macro-economic policy Focus on:  Strong financial and monetary adjustment  Agreement with IMF on new 3-year program: 4 June 2004  Debt-rescheduling: Paris Club meeting scheduled for July

Macro-economic outlook Our macro-economic policy is projected to result in:  Forecast growth of real GDP: 6% in 2004, 5% in  Likely realization of GDP growth: 10%  Inflation kept at the level of 5%

Government Revenues: planned 2004 Budget:  Increase of tax revenues by 25% (i.e. 2.0% of GDP), reaching 16.3% of GDP  Due to:  Economic growth  Financial policy measures in 2004  Ongoing reforms in tax/customs, anti-corruption  Normalization situation in Adjara Planned :  Sustainable increase of government tax revenues by 1% in each consecutive year

Government Revenues: realised  First 5 months 2004 revenues:  14% higher than planned in 2004 Budget  35% higher than in comparable period in 2003  Better performance due to:  Improved administration  Legalisation of imports  Expectation whole year 2005:  Increase of revenues by another 1.2%, reaching 17.5% of GDP

Government Expenditures: 2004  Government expenditures will increase by 43%, to 20.6% of GDP  Priorities for 2004: Social sector Social sector Rehabilitation of energy sector Rehabilitation of energy sector Reduction of domestic arrears Reduction of domestic arrears

General Government Balance  Fiscal deficit:  Planned reduction to 1.6% of GDP  Expected reduction to 1.0% GDP  Clearance of arrears:  Planned reduction with 30%  Expected reduction with 45%

Structural reforms in fiscal area Mission Statement Ministry of Finance  Establishment of financial order, creation of a foundation for stable economic growth, and the reduction of poverty  In order to fulfil Mission Statement: 6 areas of structural reform have been identified: Treasury, budget system, financial policy, tax department, Treasury, budget system, financial policy, tax department, customs Department, and financial police

Structural reforms: treasury Achieved already: Achieved already:  Commitment Control System established  Single Treasury Account created  Tax Refund procedures developed  Remaining agenda:  Completion Single Treasury Account  Introduction International Accountants Standards

Structural reforms: budget system Already achieved: Already achieved:  1 January 2004: new Budget System Law effective  Remaining agenda:  Improvement budget transparency  Institutionalization of MTEF

Structural reforms: financial policy Already achieved: Already achieved:  Abolishment Tax for Economic Activities and Road User Tax  New Tax Code and new Tax Administration code have been prepared  New Customs Code has been prepared  Remaining agenda:  New Tax Code, effective  New Customs Code, effective

Structural Reforms: Tax Department Already achieved: Already achieved:  Large Tax-payers Inspectorate strengthened  Excise Taxpayer’s Inspection was established  Optimalization of the number of Inspections  From June 2004 Adjara has been integrated into the national tax administration structure  Attestation of staff started  Downsizing of staff (156 employees)

Structural Reforms: Customs Department Already achieved: Already achieved:  Re-organisation: now only 4 Regional Customs Divisions  Reduction of customs posts on the borders with Azerbaijan and Russia has started  The status of Tbilisi Airport and Poti Port customs posts has been upgraded and 24-hours regime introduced  Escort of transit non-excise goods has been abolished  Downsizing of staff with 25%

Structural reforms: Financial Police Already achieved: Already achieved:  Creation of Financial Police under Ministry of Finance (March 2004)  Investigative functions fiscal and economic crime in one single ministry  Target 510 staff; presently 60%  3 months operational: successful, a.o. in reduction smuggling  Remaining agenda:  Improvement organization  Training and equipping of staff