(Adds more info, quotes from interview with Reuters, background)
TBILISI, Oct 9 (Reuters) - The International Monetary Fund lifted its forecast for Georgia's economic growth for this year and next, citing improving tourism, investment and domestic consumption.
The IMF said on Monday that it now expected the former Soviet republic to grow 4.3 percent this year, up from a previous forecast of 3.5 percent, and sees economic growth of 4.2 percent in 2018, against 4.0 percent previously.
Mercedes Vera Martin, head of an IMF mission visiting Georgia, said that the IMF had also agreed in principal to release the second tranche, or $42.3 million, of the fund's three-year $285 million loan programme for Georgia.
However, it also urged the country to narrow its current account deficit, implement reforms and improve the skills of its workers.
Georgia, a major conduit for carrying Caspian oil and gas to Europe, is recovering from falling exports and a plunge in the currencies of its main trading partners Russia, Turkey and Azerbaijan, which depressed economic growth in recent years.
Vera Martin said that an improved external environment and strong growth in the tourism and services sector were boosting the economy.
"We also see that domestic demand in Georgia is becoming much more dynamic and consumption and investment becoming quite mobilised," Vera Martin said.
Georgia's economy expanded by 4.7 percent year-on-year in the first eight months of 2017, up from 2.7 percent growth in the same period of 2016, thanks to higher exports and remittances from abroad.
The government in Tbilisi expects the economy to grow 4.5 percent this year, helped by private sector developments and government spending on infrastructure projects.
Vera Martin said the agreement to release the second tranche of the loan programme was subject to approval by the IMF's executive board, which is expected to consider it in November. The first tranche of $40.7 million was disbursed in April.
One of the challenges for Georgia was "to improve the potential for gross domestic product (GDP) growth over the medium term as well as to upgrade infrastructure and to improve the skills of the labour force," she said.
Another challenge is to narrow the current account deficit, which is projected at 10.4 percent in 2017, down from 12.8 percent in 2016, she said.
"We see it reaching a benchmark level of 8 percent over the medium term, but for that we need to see implementation all of the reforms and improving competitiveness," Vera Martin said.
"One more challenge for Georgia is to make growth more inclusive," she added.
Vera Martin said that the IMF estimated a budget deficit of 3.6 percent of GDP this year, narrowing to 3 percent of GDP in 2018, supported by robust revenue growth and contained current spending. (Editing by Susan Fenton)