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WASHINGTON, March 27 (Reuters) - The International Monetary Fund said on Friday that Georgia's economy, still suffering from the effects of last year's five-day war and stung by a global downturn, faces "considerable" risks and policy will have to be nimble to respond.
"The combined shocks to the current and capital accounts are likely to be larger and more prolonged than originally expected, increasing the external adjustment challenge and diminishing near-term growth prospects," the IMF board said in a summary of its annual review of Georgia's economy.
The IMF said it backed Georgia's effort to support its economy with fiscal policy and its moves to achieve greater foreign exchange flexibility.
"The move to foreign exchange auctions (is) an important step to achieving greater exchange rate flexibility and protecting international reserves, which are relatively low," the Fund said.
The IMF said the over the medium term, the move toward currency flexibility, coupled with economic reforms to enhance competitiveness, should help correct the overvaluation of Georgia's lari currency.
The former Soviet state's economy grew more than 12 percent in 2007 on the back of foreign investment attracted by the pro-Western government of President Mikheil Saakashvili.
But a five-day war in August 2008 -- when a Russian counter-strike repelled Tbilisi's assault on the breakaway region of South Ossetia -- scared off investors just as the financial crisis was beginning to take hold.
Georgia was offered $4.5 billion in conditional aid after the war and the IMF approved a $750 million standby loan, of which Tbilisi received $250 million immediately. The IMF said on Tuesday it was disbursing another $186.6 million tranche.
In its review issued on Friday, the IMF said monetary policy in Georgia should "be employed in support of the authorities' more cautious liquidity management." It said that would help ease pressures on the foreign exchange market.
The IMF said Georgia needed to closely coordinate fiscal and monetary policy to "contain" those pressures. (Reporting by Tim Ahmann; Editing by Chizu Nomiyama)