The FINANCIAL — Three suggestions for the NBG were announced last week by the International School of Economics. At the seminar organized by ISET experts said that the Georgian central bank should be headed by an independent professional, detached from politics as much as possible.
Zurab Nogaideli, former Prime Minister of Georgia who leads the advisory Business Council of ISET criticized the economic policy of the Georgian government recently. He said that sixty five to seventy thousand people working in the real estate sector will lose their jobs.
The recent reform of the National Bank of Georgia seemed to have overlooked certain difficulties that central banks face in transitional economies.
On September 24, the International School of Economics at TSU (ISET) held a Public Seminar “Challenges of Central Banking in Georgia”. The purpose of this seminar was to outline and discuss these difficulties in a simple language, as well as provide three recommendations.
According to Robert Tchaidze, Assistant Professor of ISET in order to properly evaluate how the economy would react to changes in policy variables, one would have to rely on a macroeconomic model for forecasting movements in inflation, GDP, and other variables over the medium term. As Tchaidze said, building such a model is extremely difficult, given the low quality of existing data, only 15 years of existence of the GEL, changes in the monetary regime, and other events that are hard to account for (the Russian default of 1998, the Rose Revolution of 2003, the trade embargo of 2005, and other structural changes in the Georgian economy, including ongoing development of the banking sector).
“Of particular importance, but also difficulty, is evaluation of excess demand, a rather complex issue even in countries with more stable macroeconomic structures,” said Robert Chaidze. He also added that the suggestions are more “theoretical rather than practical”. It was noted by ISET that the views of the speaker do not necessarily reflect the official position of the School of Economics.
ISET was created in 2006 by a consortium of international donors and the Government of Georgia. The Partnership for Economics Education and Research (PEER), a US-based NGO, was established in that year to provide for ISET governance and fundraising. Represented on the Governing Board of PEER are the following major donors: BP, the Government of Norway, the Government of Georgia, Open Society Institute, Swedish International Development Agency, World Bank.
The Advisory Business Council, led by former Georgian Prime Minister Zurab Nogaideli, plays a key role in building links between ISET and private sector employers and The International Faculty Committee and administration work together to assist students in applying for Ph.D. programs abroad.
It’s noteworthy to mention that recently former Prime Minister and now business executive Zurab Nogaideli gave an interview to one of the Georgian newspapers. He claimed that if direct measures are not taken by the government, unemployment will rise considerably.
The former Prime Minister added that sixty five to seventy thousand people working in the real estate sector will lose their jobs.
Nogaideli in March 2008 became chairman of Kala Capital, a group uniting businesses owned by Georgian AC Milan footballer Kakhi Kaladze. Lexo Alexishvili, who served as finance minister in Nogaideli’s cabinet, is now CEO of Progress Bank, which is part of Kala Capital. Real estate development projects in Tbilisi are hugely important for the group. Nogaideli said the company had to suspend projects following the August events.
“International School of Economics contributes to improving public policy by providing impartial analyses of economic issues confronting society and educating those who must deal with these issues. International School of Economics at Tbilisi State University contributes to economic literacy among the general public through its educational and outreach activities. ISET also carries out applied research and professional training for businesses operating in the region,” Sophia Gujabidze, Public Relations Manager, told The FINANCIAL.
The Monetary Policy Committee (MPC) of the National Bank of Georgia (NBG) decided during its meeting on September 17 to leave its Main Policy Rate, the Refinancing Loan Rate, unchanged at 10 percent.
The Committee noted that since its unscheduled meeting on September 12 there have been certain positive trends in the banking sector, especially in the growth of deposits. Risks to financial stability have decreased considerably as well. Despite the adequate amount of liquidity which currently exists in the banking system, commercial banks need additional time to evaluate the risks and adjust to the new environment, due to which credit creation has slowed.
Money supply decreased considerably during the recent military conflict, a factor which should have a positive effect on the reduction in the general level of prices. However a sharp or less than expected change in the money supply may have a negative effect on economic growth and on the inflation rate of the following periods. The proposed supplement budget, which envisages increase in the deficit to the amount of GEL 500 million, will help to increase the money supply.
The Board of the International Monetary Fund approved on September 15 a loan to the amount of USD 750 million for Georgia, under the 18-month stand-by arrangement, which is designed to support the Balance of Payment. It is expected that the approval of the stand-by program will increase investor confidence which should help Georgian companies in attracting foreign capital from international markets.
The existing inflation risks have not changed since the last meeting of the MPC. Prices of the main commodity groups, including those of oil and wheat products, have continued to decline.
Last week Bank of Georgia became the first Georgian bank to join the IFC Global Trade Finance Program. IFC said a finance line of USD 20 million will allow it to provide guarantees against its clients’ trade transactions and facilitate trade in the country.
At the Public Seminar three suggestions were made for NBG. First was that the key to success of the central bank is its independence, factual, not just outlined on paper. For Georgia, this means that the parliament should adopt legislation that would clearly define the goals and instruments of the NBG, as well as ensuring substantial distance between its governing bodies and the country’s politicians. In particular, the worst thing that can be done is to make the appointment of NBG leadership part of political bargaining when ministerial and committee chairmanship positions are filled. It was said that the central bank should be headed by an independent professional, detached from politics as much as possible.
The second suggestion made by Mr. Robert Tchaidze was that given the operational difficulties that the NBG faces, it would be wise to refrain for the time being from formally adopting inflation targeting.
According to Assistant Professor of ISET initiating this mechanism when the likelihood of its failure is high will only compromise the idea, undermine credibility of the NBG, and thus, make it harder to implement inflation targeting at a later, more appropriate stage. Instead, the
NBG can formally make inflation its top priority and subordinate other objectives, while putting the other necessary elements for an inflation targeting policy in place.
The final third suggestion was over-reliance on automatic rules, such as zero budget deficit or automatic sacking of the NBG leadership, should be avoided. As Tchaidze said, these rules will not be sufficient and will not protect Georgia from economic malaise. Automatic firing of the NBG leadership will only lead to frequent rotations at the top of the NBG, interfering with its operations. Instead, constant communication between all involved parties – the NBG, the Finance Ministry, the respective parliamentary committees, and business leaders – should be ensured, to guarantee that all policymakers are working in tandem.
“The independence of the National Bank of Georgia (NBG) is guaranteed by the law and currently there are no doubts about it. If there were any reasons than there would be questions too. In reality NBG is fulfilling its duties. If it were not for NBG, the Georgian banking sector would have fallen into serious depression, which didn't happen,” Zura Gvasaria, President of the Association of Banks of Georgia (ABG), told The FINANCIAL.
ISET provides merit-based and need-based scholarships covering from 60% to 100% of tuition costs. This means that, in 2008-2009, the best students will study for free, while others will be expected to pay only USD 1,600 or USD 3,200 per year. Students whose personal or family situation does not allow them to obtain an educational loan from a commercial bank may apply for need-based scholarships to defray the cost of tuition at ISET. The maximum size of such scholarships shall be USD 1,600. Need-based scholarships involve a work obligation as an administrative assistant. According to an ISET representative all students accepted into the Master’s programme will be invited to study tuition-free during the first mini-term (8 weeks in September-October 2008). Based on performance in this mini-term, merit-based scholarships for the first year of study will be allocated as follows: 100% – 20 scholarships (including 3 for Armenian and Azerbaijani students each) – GPA at least 3.33 (B+), 80% – 15 scholarships (including 3 for Armenian and Azerbaijani students each) – GPA at least 3.00 (B), 60% – 15 scholarships – GPA at least 2.67 (B-). Students from the outlying regions of Georgia, as well as students from Armenia and Azerbaijan may apply for a housing allowance of up to USD 100/month.
In the academic year 2008-2009 will receive stipends to cover living expenditures. During the first mini-term, all students admitted in fall 2008 will receive living stipends of USD 80/month during the first mini-term. Tbilisi State University (ISET) opened its doors to students in 2006 to offer the first world class Master’s Program in Economics in the South Caucasus. 34 students were in the class of 2008, 6 (17%) international, 26 students in the class of 2009 (6 on probation, no international students) and 53 in the entering class (class of 2010).
By Levan Lomtadze
Discussion about this post