Georgian Central Banker Seeks to Renew Trust as Easing Continues

  • Interest rates are on ‘downward path,’ Gvenetadze says
  • Bank is replenishing reserves after ‘turbulent’ 2015 for lari

Georgia’s new central bank governor said he’ll repair public confidence in the regulator following bruising confrontations with the government, as he indicated that interest rates will continue to fall.

The monetary authority “lost some credibility” due to a “quite turbulent 2015” amid clashes between the government and his predecessor over the lari’s exchange rate and plans to strip the regulator of its supervisory powers, Koba Gvenetadze said in an interview in the capital, Tbilisi, on Tuesday. The benchmark interest rate is on a “downward path” after a cut of 0.5 percent to 7.5 percent in April, the first reduction since August 2013, as data showed inflationary pressures easing, he said.

Koba Gvenetadze
Koba Gvenetadze
Photographer: Helena Bedwell/Bloomberg

“It’s definitely in the interest of the country and the economy to restore” public trust in the bank, Gvenetadze said. The rate may fall to 5 percent to 6 percent by the end of 2017, though “the speed and trajectory and steepness will very much depend on new information we receive,” he said.

Gvenetadze, 45, became governor in March, replacing Giorgi Kadagidze whose seven-year term expired. The government repeatedly accused Kadagidze last year of doing too little to defend the lari. The currency plunged 21 percent against the dollar in 2015, rocked by a recession in neighboring Russia and the conflict in Ukraine, and Kadagidze refused to spend reserves to support it. Exports to Russia plunged to $217 million last year from $336 million in 2014, according to International Monetary Fund figures compiled by Bloomberg.

The government also sought to remove the regulator’s responsibility of supervising commercial banks by creating a separate financial monitoring board, a move vetoed by President Giorgi Margvelashvili amid criticism from international institutions that it undermined the regulator’s independence. The legislation is now being reviewed by the Constitutional Court.

Supervision Powers

Gvenetadze, who was a senior economist at the IMF in Washington for 13 years until 2015, said he opposed removing the central bank’s powers to supervise lenders and “I confirmed that” to legislators at hearings for his appointment.

While the bank is buying foreign currency to boost reserves from about $2.5 billion currently, it isn’t trying to influence the lari’s exchange rate, which is determined by the market, he said.

“We’ll be very careful but I think this is a very good time to replenish some foreign exchange which we lost during the last year,” Gvenetadze said.

The new governor is showing “good signs” that he’ll safeguard the bank’s independence, Vato Lejhava, chancellor of the Free University of Tbilisi, said in an interview.

“He didn’t start by bashing his predecessor, and he demonstrated a strong and clear approach toward the supervision board at the parliamentary hearings,” Lejhava said.

Inflation Target

The central bank’s “independence will be maintained and will be even improved,” even in the heat of a contest between political parties for parliamentary elections in October, Gvenetadze said. Its mandate is to maintain low inflation and “all our decisions will be based on this,” he said.

The bank expects to hit its inflation target of 5 percent by the end of this year, from 3.2 percent in April, he said. It cut the interest rate because “there were indications in the economy that we could start phasing out tight monetary policy” as new data showed inflation declining, Gvenetadze said. While the bank will continue monitoring risks at every policy meeting, “right now what we are indicating is the downward path, which is appropriate today.”

Inflation-targeting approach depends on “very good communication strategies” and he’s introducing regular briefings after rate-setting meetings because “I want decisions that are made by the central bank to be well explained and well understood,” he said.

Shock Absorber

The governor said the bank has an inflation target of 4 percent for 2017 and 3 percent for 2018. The economy will grow about 3 percent this year and may expand 4 percent to 6 percent over the next two to three years, consistent with policy makers’ inflation targets.

Achieving these targets will demonstrate the monetary authority’s independence and help restore “public credibility,” he said. “When the public trusts the central bank, it very much contributes to financial stability and to trust in the lari.”

The currency has rebounded 10 percent this year. A floating exchange rate is “a very good shock absorber for a small, open economy like Georgia,” which achieved 2.8 percent of economic growth last year, despite the currency’s plunge, Gvenetadze said.

“While some other countries at some point kept the exchange rate stable, spent quite a lot reserves, the final outcome was still a need for a large depreciation,” he said.

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