Georgia Sustains Bold Measures to Reform Social Support Mechanisms

• Pages: 244-245

Page 244

In response to a request by the Georgian authorities for technical assistance on the design of social support mechanisms, an IMF staff team mission visited Tbilisi in late June. The IMF team, headed by Sheetal K. Chand, included Marinus Verhoeven and Meike Gretemann, all of the Fiscal Affairs Department. The following is based on an account of the mission's findings.

During the past two years, Georgia has made major strides in stabilization and structural reform after a period of acute economic crisis. Between 1991-94, the Georgian economy suffered from the disintegration of trade and financial relations in the countries of the former Soviet Union, civil war, and adverse policy choices. Real GDP declined by an estimated 60-65 percent between 1992 and 1994, and the economy experienced hyperinflation. Following the implementation of tight financial policies and the liberalization of prices, trade, and the exchange system, growth resumed in 1995. It accelerated in 1996 and is expected to reach 10 percent in 1997, against a background of a stable exchange rate and declining inflation. At the same time, structural reform has continued to advance, laying the groundwork for increased private sector activity and sustained growth over the medium term.

The economic collapse eroded Georgia's ability to sustain traditionally high social outlays. The authorities took bold steps to overhaul the country's social protection system by virtually dismantling the former full array of benefits that promoted distributive, safety net, and social insurance goals, replacing it with a pure safety net. Reforms of the social safety net and health and education sectors aim at improving services and benefits, while increasing the sustainability of the social protection mechanisms by targeting assistance to vulnerable groups. Eventually, the authorities plan to introduce social insurance schemes to supplement the safety net.

Elements of the Social Safety Net

The Georgian government channels social safety net benefits through a Social Security Fund, an Employment Fund, and a Health Fund. The Social Security Fund, established in 1991, provides old-age, invalid, and survivors' pensions on a pay-as-you-go basis. It collects its own revenues from payroll taxes that, in 1997, consist of 27 percent paid by enterprises and a mandatory contribution...