IMF Expected to Lend Georgia $750 Million to Aid Economic Recovery

Sources: "IMF Mission Reaches Agreement in Principle on a US$750 million Stand-By Arrangement with Georgia", The International Monetary Fund; "IMF approves $750 million loan to Georgia-minister", Reuters; "In Rebuff to Russia, IMF Is Set to Lend Georgia $750 Million", The Wall Street Journal

The International Monetary Fund (IMF) has provisionally agreed to lend Georgia $750 million to help revive the country's economy after its recent conflict with Russia. The agreement is currently an "agreement in principle," which means that it is a preliminary agreement that could result in a final, binding agreement. The IMF Executive Board will consider whether to officially approve the agreement in mid-September.

If approved, the loan will be issued in the form of an 18 month stand-by agreement. Stand-by agreements allow countries to use IMF financing (up to a specific monetary amount) to overcome short-term financial difficulties. As part of these agreements, the IMF sets "performance criteria" that a country must meet before it is able to collect funds. Performance criteria often come in the form of periodic monetary or budgetary targets that allow the IMF to determine whether the country receiving the loan is (or is not) making economic progress.

Though the IMF has not revealed what monetary targets it will set for Georgia's loan, IMF officials hope that the agreement will achieve several objectives. First, officials hope the loan will help counteract the notable blow that the Georgian economy has taken as a result of the war with Russia. Before the conflict, Georgia's economy was expected to grow considerably; as a result of the war, Georgia has now been forced to request $1-2 billion in international aid to repair and develop infrastructure affected by the war.

The loan is also intended to reinforce outside investors' confidence in the Georgian market and promote the recovery of general private sector investment in Georgia. Foreign investment has played, and continues to play, a crucial role in Georgia's economy, as it composed 1/5 of Georgia's gross domestic product in 2007. As such, reviving foreign investment in Georgia is a particularly important objective for the country's officials.

On a political note, IMF officials have openly stated that they hope the loan will support the economic policies of the current Georgian government and encourage political stability in the country. The current Georgian administration is headed by an American-educated president and supports market-friendly economic policies, so some commentators have suggested that the IMF's provisional loan package is symbolic of the West's desire to "strike back" at Russia after its invasion of Georgia. Such commentary undoubtedly will increase the public interest in this topic while the public awaits for the Executive Board to approve the financial package.

Questions:

1. Both IMF and Georgian officials have stated that one of the principal objectives for the loan package is to strengthen the confidence of outside investors in the Georgian market. To what degree, if at all, would a loan agreement with the IMF strengthen a foreign investor's confidence in an economy that is recuperating from war?

2. There has been talk of the United States and the United Kingdom preparing similar financial assistance packages for Georgia. To what extent do such developments reinforce the idea that the West is counteracting Russia's attack on Georgia using financial, rather than literal, weapons?