Growth Recovery Support Program The loss of investor confidence, caused initially by the August 2008 conflict and then by the international financial crisis have caused a sharp  slowdown  in  capital  inflows  (both  foreign  direct  investment and private lending) to Georgia. The inflows may not recover to the pre-crises  levels  until  2010.  These  exogenous  shocks  are  being amplified by a slowdown in Georgia's export markets and a reduction in incoming remittances. All major components of aggregate demand in the economy have contracted and the macroeconomic  outlook  for  Georgia  has  been  revised  downwards, and remains very uncertain at this stage. Before the August conflict, real gross domestic product (GDP) was forecast to grow at 11–12% in 2008. The actual GDP growth was 2%, with the forecast for 2009 at  1%.  Economic  activity  has  slowed  considerably,  profit  margins have sharply decreased, and layoffs have risen. The social consequences of these developments could be very severe.
 
The  Government  and  the  monetary  and  financial  sector  authorities in Georgia have worked closely to address these challenges. When the Georgian lari came under pressure in August 2008, and again in October and November, the National Bank of Georgia (NBG) intervened  to  support  the  currency.  To  shore  up  reserves  depleted in  defense  of  the  lari  and  to  bolster  lari  depositor  confidence,  the Government  and  the  NBG  entered  into  a  $750  million  Stand-By Arrangement (SBA) with the International Monetary Fund (IMF). By helping  to  rebuild  the  official  foreign  exchange  reserves  and  to restore  confidence  in  the  lari,  the  SBA  framework  supports  the Government's macroeconomic policy objectives of accelerating recovery  through  fiscal  stimulus,  allowing  exchange  rate  flexibility, and safeguarding banking system stability.
 
A  significant  macroeconomic  stimulus  is  required  to  counter  these adverse  shocks.  However,  the  very  high  and  increasing  use  of  the US dollar in the economy constrains what fiscal or monetary policy can  do.  Such  constraints  can  only  be  relaxed  by:  (i)  recourse  to external and long-term loans from development partners to finance core  public  expenditures  and  augment  foreign  exchange  reserves, and (ii) maintenance of some exchange rate stability, to avoid sharp fluctuations  in  the  value  of  the  lari.  In  parallel,  the  banking  system needs to remain stable for these measures to be effective. 
 
The joint needs assessment (JNA) by several development partners in  September  2008  remains  the  most  appropriate  framework  for dealing with the crisis, both in terms of assessing the need for, and designing, budget support and infrastructure and social sector assistance. The JNA identifies a need for intervention and development partner assistance in three major areas: (i) to help the Government ensure that critical economic and social needs are met and confidence is maintained, with quick-disbursing budget support to  back-stop  countercyclical  fiscal  measures  of  rapid  effect;  (ii)  to resettle    internally  displaced  persons  and  address  the  post-conflict needs of affected populations; and (iii) to support critical new investments. The JNA notes that high-value and high-yield investments  are  key  to  maximizing  recovery  prospects  and  that such  investments  will  also  have  lasting  positive  effects  on  the economy's productive capacity.
 
The JNA estimated the overall resource requirements at $3.7 billion over a 3-year period. Actions were prioritized in three stages: stage 1  (6  months,  September  2008–March  2009);  stage  2  (12  months, April 2009–March 2010); and stage 3 (12–18 months, March 2010–September 2011). The relevance of the JNA has been reinforced by the severity of the impact of the crisis on Georgia and the continuing uncertainty of capital flows.
 
The proposed Program is a follow-up to the EAPCR. The macroeconomic policy framework anchor is provided for in the SBA between  Georgia  and  the  IMF.  Like  the  earlier    program,  it  is anchored on the JNA. It will continue ADB support for the Government to help it meet critical public expenditures and cushion the  adverse  revenue  shocks  that  will  probably  persist  throughout 2009. The Program will complement two planned ADB infrastructure projects (the Municipal and Urban Infrastructure Development  Project  and  the  Ajara  Bypass  Roads  Project).  The World  Bank  plans  to  provide  $85  million  in  budget  support  through its  Development  Policy  Operation.  The  European  Union  is  also expected  to  provide  budgetary  assistance  in  the  near  future.  The Program will support the following outputs.  
    
Output  1.  Incremental  expenditure  needs  arising  from  the  worse-than-expected economic conditions in 2009 are met without complete drawn down of cash balances at NBG.
 
Output 2. The delivery of the core Government expenditure program for 2009 in accordance with the approved budget, irrespective of subsequent revisions that take into account shortfalls in revenue.