Georgian economy, ongoing reforms, de-dollarization and fluctuations in exchange rate – IMF Mission Chief Mercedes Vera Martin spoke about these issues during her interview with the First Channel.
– According IMF’s last press-release, Georgia’s economic performance has improved, but risks to the outlook remain. What are these risks?
Risks to the outlook are balanced. What we call upside risks expected positive effects arise from stronger domestic demand and a more supportive external environment. On negative risks, Georgia remains vulnerable to regional developments. More inward-oriented policies and weaker economic growth in key advanced and emerging economies could undermine the efforts to promote trade and reduce external imbalances. Tighter global financial conditions and a stronger U.S. dollar could deteriorate debt dynamics.
– The IMF changed Georgia’s economic growth forecast for 2017 to 4.3 percent instead of 3,5 percent. What gives you such an optimism?
We revised upward our forecast because economic data showed more robust growth than anticipated. At the time of our report, economic growth through September reached 4.7 percent year-over-year (y-o-y),supported by private consumption and net exports. Economic activity has benefited from favorable external conditions, including higher growth in trading partners.Through August, goods exports and tourism receipts rose by almost 30 percent y-o-y, remittances 20 percent, and imports 9 percent.Fiscal overperformance and efforts to address structural weaknesses have also helped boost confidence.
– According IMF’s last press-release, to further support growth, Georgia also critically needs to advance on education reform. What would be your recommendation regarding education reform?
The lack of qualified workers is reported as one of the key obstacles for doing business in Georgia. The authorities should pursue their reform plan, developed with support from the World Bank, which focuses on setting curriculum standards, a new teacher performance evaluation, vocational training, and adult learning.
– What is the Fund’s outlook for the medium-term growth in Georgia?
Assuming a supportive external environment and steadfast implementation of the Government’s reform agenda, we expect economic growth to gradually increase to around 5¼ percent per year over the medium term. The outlook hinges on reducing economic vulnerabilities andgenerating higher and more inclusive growthas Georgia’s ambitious structural reforms help diversify the economy and create jobs.This is in line with the IMF-supported program that was approved by the Executive Board in April 2017.
– The National Bank of Georgia is often criticized for floating exchange rate, but the IMF supports the floating exchange rate in Georgia. In your opinion, in the current situation when GEL continues to depreciate for the last three years, is it optimal to have floating exchange rate?
The IMF does not comment on short-term bilateral exchange rate movements. But let me say that the changes in the exchange rate over the past three years have reflected changing economic conditions and are consistent with a floating exchange rate regime. Exchange rate movements have been largely determined by the supply of and demand for foreign exchange. As the central bank focuses on price stability, the National Bank of Georgia (NBG) should focus on inflation developments and limit foreign exchange (FX) intervention to periods of excessive market volatility or when there is a need to rebuild reserves. It is important that the NBG continues to operate under the floating exchange rate regime, which has served Georgia well to address external shocks.
– In last three years GEL depreciated for almost 54%. In recent years NBG and some representatives of the government said the GEL depreciation was caused by external shocks. But today they “blame” expectations. Despite the depreciation process, NBG did not spend money from the reserves to strengthen the Lari. What steps should NBG take?
As noted before, the NBG focus on inflation is appropriate. FX intervention should be limited to periods of excessive market volatility or a need to rebuild reserves. Following the increase in interest rates during the first half of 2017, the current monetary policy stance is broadly adequate. Conditional on the NBG’s interest rate path (a decline of about 100 basis points over the next two years), inflation is projected to decrease in early 2018 and converge gradually to the three percent target by end-2018.
A change in economic conditions that prevents the NBG from reaching its inflation target, such as a large exchange rate depreciation leading to an increase in inflation expectations, should be accompanied by the appropriate policy response, which could include tightening the monetary conditions.
– Head of NBG said he did not rule out monetary policy tightening, if there is a risk of higher inflation. If so, what would be your recommendation?
We agree with the NBG. Tightening will be consistent with the inflation targeting monetary framework if there were a risk of persistently higher inflation and inflation expectations.
– Last year Georgian Government with the National Bank developed a program of de-dollarization of national currency, which, according to some analytics is not as effective, as the government hoped. From your point of view how effective is de-dollarization program for a country like a Georgia and what benefit it can have?
Georgia’s larization plan hasyielded some positive results, although dollarization remains elevated. The plan to reduce dollarization rightly focused on increasing long-term lari funding, promoting lari pricing, and reducing FX-related credit risk. Loan dollarization declined from 64 percent in December 2016 to 57 percent in September2017—despite higher interest rates on GEL loans. Over the same period, deposit dollarization decreased by 5 percentage points, to 65 percent of total deposits. That said, we know, from countries that successfully de-dollarized (e.g Peru, Poland), that the process takes time. In general, de-dollarization strengthens monetary policy by better linking market interest rates to central bank interest rates. By reducing loans in foreign currency, financial stability also improves as exchange rate volatility does not affect the capacity to repay. Also, lower deposits in foreign currency strengthens the central bank role as lender of last resort at times of financial stress.
– Georgia participates in an IMF program worth $297.5 million. the Executive Board of the International Monetary Fund (IMF) completed the First Review of Georgia’s performance. The completion of the review enables the release of SDR 30 million (about $42.4 million) for Georgia. How the program will help country’s economic growth?
The IMF program supports the authorities’ Four Points Plan.The authorities’ policy agenda focuses on supporting investment and improving education, the business environment, and public administration efficiency, which aims to boost potential growth while preserving macro stability and fiscal discipline. In particular, the program envisages scaling-up public investment, whichwill help leverage Georgia has a logistic and tourism hub in the region.A forthcoming Public Private partnership (PPP)law will facilitate private sector participation in large infrastructure projects while preserving fiscal sustainability.Capital market and pension reforms will help mobilize domestic savings and private sector investment; while education reform will be critical to promote higher and more inclusive growth.Trade integration will help mobilize foreign direct investment (FDI) in the tradable sector, improve competitiveness, reduce external imbalances and generate more balanced growth.
Interview by Mari Javakhishvili