The FINANCIAL — “National Bank of Georgia expects inflation to start declining from June down to 8% by the end of this year.
In the next year inflation will decline further to 6 percent which is NBG’s target rate of inflation,” said Archil Mestvirishvili, Vice Governor of National Bank of Georgia.
“We are currently projecting economic growth to be around 5.5% in 2011, moderating to about 5% during 2012-2014. Exports, expected to play a key role in driving economic recovery, are projected to expand further from 34.8% of GDP in 2010 to 36.7% in 2011 and 39% by 2014. Export growth is expected to come from new products, as well as further growth of the current export basket, including metals and metal products, wines and beverages, fruits and nuts, and repaired and re-exported cars on the product side; and transport and tourism on the services side,” said Pedro L. Rodríguez, Lead Economist at the Poverty Reduction and Economic Management Unit of the World Bank.
“The authorities’ efforts to raise productivity and private investment in tradables through targeted investments in infrastructure, initiatives to attract private investors, reforms to enhance market access and raise quality and standards, and renewed discussions on improving skills are all elements contributing to our positive forecast. A key element to validate our projections is the recovery of private (domestic and foreign) investments, which would need to recover from 8.3% of GDP in 2010 to 9.7% in 2011 and 15.3% by 2014,” Rodríguez added.
First quarter 2011 real GDP growth was of 5.8%, up from 3.9% in the first quarter 2010 and a touch slower than 6.0% in the fourth quarter. With the GDP deflator accelerating to 13.4%, nominal first quarter GDP reached 2.9 billion USD (+17%). The key contributors to first quarter growth were manufacturing (+9%), transportation (+9%) and the financial sector (+24%). Construction was the only sector to retreat (-3%).
“In the first quarter of 2011 GDP increased by 5.8% in real terms. Taking into account the growing rate of credit to the economy, export and tourism revenues we expect the real growth of the economy in 2011 will be around 5.5 percent,” Mr. Mestvirishvili said.
“It’s very good when GDP increases, however, separate and mechanical increase does not bring anything. Growth should be in accordance with development. GDP absolute indicator and increase GDP per capita is interesting and important when increase in wealth and economic development reflects on the majority of the population. What’s vital is how much wealthier each family is becoming against the background of GDP, not the case when this increase was achieved by 10% of society experiencing an increase in their salaries, while for the remaining 90% in the best cases their income was not decreased,” Kalandadze noted.
In the list of countries by GDP (PPP) per capita, according to the World Bank Georgia is ranked as number 117 in the world, as for the International Monetary Fund Georgia is in place 94 while according to the CIA World Factbook it is in position 122. (Year 2009). In the list of countries by GDP (nominal), according to the World Bank Georgia is ranked as number 113 in the world, as for IMF Georgia is in place 117 while according to the CIA World Factbook it is in position 120. (Year 2009). The World Bank stated the total GDP of Georgia, excluding Abkhazia and South Ossetia, to be 10,744 million USD.
“Inflation in Georgia has picked up markedly since the second half of 2010 after being in the low single digits for most of the post-crisis period. Inflation picked up to 11.2% (end-of-year) in 2010 and 14.3 percent in May 2011 from 3% in 2009. Food prices inflation was 30.7% in May 2011 and fuel inflation was 21.4%. Inflation in Georgia has been primarily driven by international factors, but these have been significantly exacerbated by domestic conditions, and mitigated by the authorities’ policy reaction,” explained Mr. Rodríguez.
“The increase in price is governed by two internal and external factors. Due to the fact that most of the share of the Georgian economy (up to 70%) depends on foreign economy, our consumer demand depends on the delivery and price of foreign products. From this point, even minimum changes on external markets have a negative effect on our consumer prices, including primary goods,” said Mr. Levan Kalandadze, expert in economic issues.
Mr. Kalandadze outlines the problem of inflation and protection of society from it. “The high inflation indicator and lowering purchasing power of GEL practically decreased society’s accessibility to primary goods and services. The amount increased in country and government spending politics is ineffective, which supports the deepening, existing high inflation and crisis background. Simply speaking, the Government is spending more than the amount of income it has,” explained Kalandadze.
“The recent increase of CPI was driven by food prices that in turn were reflection of a high world prices. We are keeping other factors of inflation under control, annual core inflation (i.e. excluding food and energy) was only 1.7% in May and inflation of services is only a 1%. Food price inflation is temporary and we expected to have an opposite effect on the CPI in coming months,” explained Mr. Mestvirishvili.
As I have already mentioned the target rate of inflation for NBG is an annual 6% in a medium term, which means that NBG will employ all the instruments at hand in order to keep changes in price level at the target level,” Mr. Mestvirishvili said.
Kalandadze explained the fact of customer prices being nearly the same in Georgian and European markets due to high dependency on foreign markets and economies. “We are formed as a consumer country. We either do not produce or produce a very small number of products or services, which are consumed by others. Consequently, foreign markets direct our local one in price politics and we have nothing left to do but just confirm the rules of the game, otherwise say no to import. At this stage, no alternative is available,” Mr. Kalandadze said.
The World Bank’s June, 2011 issue of the Global Economic Prospects provides substantial analysis on food and other price developments in the world.
International factors: In particular, it stressed three points in this regard:
- Strong GDP growth and the elimination of spare capacity in major developing economies has contributed to a sharp increase in the prices of metals and oil during the second half of 2010 and into the first months of 2011. Higher energy prices have in turn contributed to increased fertilizer and agricultural production costs, which in combination with supply shortfalls in several markets caused food prices to spike in the second half of 2010 in the face of only gradually rising demand.
- As of early 2011, prices of internationally traded food commodities reached levels just below peaks observed during the 2008 food crisis. However, the overall price of grains — the most critical food component from a poverty standpoint— did not increase as much as in 2008, mainly because international rice prices remained broadly stable. Since February, commodity prices have stabilized or declined, reflecting weakening demand and perhaps profit taking by institutional investors. Prices are off earlier peaks by between 3 and 10 percent for the main aggregates.
- Once the short-term supply-shortage induced component of current high food prices dissipates; and assuming (i) that energy prices ease, and (ii) that 2011/12 is a normal crop year, then long-run equilibrium food prices should also tend to decline over the next few years. Nevertheless, food prices are anticipated to remain substantially higher than during the late 1990s — largely reflecting higher fuel and fertilizer costs. In the WB’s baseline projection, wheat, maize and rice prices are expected to decline in 2012 to roughly the same level as in 2010.
Domestic factors. There are a number of elements that have exacerbated the pass-through between international price inflation to domestic inflation, particularly for the case of food prices. These include:
- High shares of food and fuel in the consumer’s basket. Food and fuel account for about half of the consumption basket and about a third of the merchandise import basket, which have certainly contributed to the pass-through from global to domestic prices. Perhaps more important are the consumer habits with respect to food: Georgians consumer more wheat (the price of which has been most affected by international conditions) than rice or corn (that has been less affected). As a result, the pass through from international to domestic prices has been particularly high in Georgia relative to, say, MICs in East Asia or Latin America
- Perhaps most importantly are the “thinness” of agricultural markets in Georgia. As a result, production of basic foods (e.g., vegetables, milk and milk products) fluctuates a lot in Georgia within a year—even in the absence of external shocks.
As a result of both international and domestic factors, food inflation in Georgia has been high, and among the highest in the world as the graph below shows.
Policy reactions. It should be noted that not all the international shock has been transmitted to local food prices, despite the vulnerabilities that are very Georgian-specific and that we have pointed above. Also is worth noting that food inflation has not resulted in significant overall inflation, which although high for Georgian standards is not among the highest in the world. Finally, so far there is no evidence of second round effects on prices of products other than food or fuel (with core inflation at about 2 percent).
In this regard, we would like to commend the policy responses that the National Bank of Georgia (NBG) and the fiscal authorities have taken in response to the inflationary pressures, as they have certainly contributed to mitigating the inflationary effect of food and fuel prices. The responses include the progressive increase in the refinancing rate from 5 percent in June 2010 to 8 percent in February 2011, as well as other complementary monetary measures. The tightening of fiscal policy (relative to last year) has also contributed to mitigate inflation.
A second important policy reaction relates to mitigating the impact of food inflation on the poor. While clearly the bulk of the urban poor have been negatively affected, in rural areas a significant proportion of household’s income comes from agricultural products which prices are increasing. Hence, while in the short-term even the rural poor are likely to be negatively affected, they could see improvements in their incomes over the next several months. Another important consideration with regards to the poverty impact of food inflation is that high prices are good for attracting investments into agriculture, and hence for employment generation.
The key policy response to mitigate the negative impacts of food price increase is the pace of expansion in the coverage of the safety nets (broadly defined). With respect to the targeted safety net, efforts have been made to improve the actual targeting of the key social assistance programs (including better identifying the poor and increasing benefits), but the agenda of increasing coverage (mainly by allocating additional budget allocations) still remains. In the context of the broadly defined social protection strategy, the distribution of GEL 57 million (US$ 34 million) in untargeted food and electricity vouchers, and the plan to raise pensions by 25 percent from September 2011 will certainly cover a significant part of poorest households, both directly and indirectly (via the family links), and it is indeed a more expeditious way to reach the poor in the short term.
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