The possibility of single figure inflation this year

Maka Ghaniashvili

Inflation indicator grows more and more in Georgia. Experts mainly distinguish two groups while talking about reasons: the first, non monetary factors like increasing prices on fuel, food etc. that also affected consumer prices indicator in Georgia directly (such as increasing prices on fuel or wheat), as well as indirectly – increasing production expenditures and growing prices on corresponding products.

Besides, inflation indicator is affected by monetary factors that are caused by growth of monetary masses. For example, foreign investment has sharply increased demand on Gel, although it could not make an adequate production. Government expenditure policy should be taken into consideration while talking about inflation. Georgia’s government expenditure policy, particularly recent one (social assistance, vouchers of different types etc) supports the increase of Gel that on its way increases inflation. We have discussed the possibility of keeping 8% inflation in Georgia with expert of economics, Iasha Meskhia taking current local as well as global factors into consideration.
– While talking about reasons of inflation growth, government mainly emphasizes foreign factors. Do you think this approach is acceptable? What can be said on internal factors of inflation?
– The worst decease of economics – inflation growth can be depended on both external as well as internal economic processes, instability in the world economy. It can also be depended on joint actions of foreign and local processes. Ongoing inflation growth in Georgia is caused by the above mentioned two factors. Foreign factors affecting inflation is mainly of non-monetary character, National Bank of Georgia, that is obliged to regulate mainly the stability of consumer prices due to amendments taken into organic law, does not possess its regulation mechanisms. It implies the growth of prices on strategic products, such as oil, wheat and different types of food. The government explains inflation growth by these factors. Inflation indicator reached 12.3% in March of the current year, although the government has taken the obligation to keep annual 8% inflation indicator. It is difficult to define the share of external and internal factors in inflation growth. Although there is no doubt that internal monetary and administration factors play immense role in inflation growth in Georgia. One of significant internal factors that causes inflation growth in Georgia is irrational distribution of budgetary means that is followed by wrong structure of expenditures: such as financing so called ‘employment program’ that nearly has no effect. This amount is nothing more than a kind of support to decrease tension of unemployed people. There are number of these type of inflation budgetary expenditures – patriots’ camp, students’ subbotniks, voucher expenditures on fuel, wood, food presents, election events etc. budgetary assistance towards low income population is of course an acceptable and human action, although it does not solve a problem. it just stops it for a while and later is followed by a negative outcome – inflation growth. Another internal factor stimulating inflation is putting privatization incomes into budget and spending it quickly. As a rule, these types of means should be directed to special funds and they should be spent step by step in order to develop real sector. Quite a big amount goes into budget from the units privatized to foreign subjects. This amount enters in foreign currency and goes into budget as national currency. It certainly increases the amount of money that is a cause of grown inflation. The third internal factor of inflation growth is neglecting the implementation of antimonopoly policy. It is followed by setting monopoly prices. ‘Aversi’ and PSP’ can serve as a good example of it. The companies keep growing prices on medicine. The same applies to transport and communication sectors. Using bus, micro bus and taxi services became expensive. Mobile phone operators impose monopoly prices for their service too. The fourth cause of inflation growth is ongoing processes in monetary sphere. First of all it applies to the growth and short terms of banking loans. The country’s banking sector increased crediting to 5.1 billion Gel. 1.8 billion Gel is issued in national currency. 3.3 billion Gel is issued in foreign currency. As a result amount of cash quickly grows. During the recent 5 years it has increased three times and reached Gel 1.3 billion by March 1 of the current year while the indicator did not exceed Gel 474 million in 2003. M3 money grows. It amounted to about Gel 1 billion in 2003. By March 2008 it increased to Gel 4 billion. M3 has increased nearly 5 times in a short period of time. M2 in 2003 amounted to Gel 528 million. By March 1, 2008 it increased to Gel 2.3 billion. Large amount of foreign currency flows in Georgia as monetary transfers (about USD 700-800 million per year). Foreign investment of about 1 billion is attracted per year. All the above mentioned amount should be changed into national currency. As a result demand on Gel increases. It means that it has significantly increased. For instance: Gel exchange rate against USD in 2004 was 1:1.82. in 2007 it was about 1:1.47. in order to keep stability of exchange rate NGB has to purchase foreing currency. Due to it reserve money indicator in foreign currency reached more than 1.4 billion for the first quarter of current year. We could also name other reasons of inflation growth (like court agreements, shadow economics etc), although their influence level is not as magic as that.
– What do you think is an inflation growth forecast like and what tools does the government possess to manage it?
– Last year consumer price index reached 111.0%, food products – 111.4%, non-food products – 107.9%, service – 113.1%. in January- March 2008 consumer price index reached 103.5%. Society can see quite well that prices on clothes, communication, alcoholic beverages, tobacco, food, home appliances, water, electricity, gas etc. grows. Experts consider that inflation rate is higher that it is officially declared by statistics. Following from the fact, that government expenditures rise, a lot of monetary resources flowed to market in connection to elections. Volume of money transfers grow. Foreign investment of inflation character grow, especially in non production and banking sector. Free industrial zone is being created, pensions, salaries and different types of financial assistance increase. The world crisis develops (grown prices on energy carriers, food etc), therefore it will be quite hard to keep inflation rate on government planned 8% level. The idea, that Georgia is not yet highly integrated in the world economy and therefore global crisis will not influence the country, is wrong. The fact is that, all strategic products enter Georgia (energy carriers, wheat etc). Moreover, 60% of our consumed goods is imported. Maybe Georgia is not integrated in the world economy, as out export is very insignificant, but the world economy is integrated in our country. Import and its growing share proves this fact. That is why current problems in the world economy will definitely increase consumption price index in Georgia. Its worth noting that inflation rate in Georgia’s partner countries is much higher than in Georgia – it reached 13.3% in Russia, 26.2% in Ukraine, 19.3% in Azerbaijan. Its obvious that inflation import will take place in Georgia as well.
– What can you say about grown responsibility? Do you think it will be able to overcome inflation?
– Georgian National Bank has a leading role in managing inflation. Legislation has strengthened it recently. National Bank has nearly freed from implementing other functions. Financial supervision agency has been created. It became responsible in banking, insurance and securities spheres. Although signs of lack of experience already appears. It may cause new problems in future. As it becomes obvious National Bank will face a fight against inflation. It promised to the society that inflation target in 2008 will be kept within 8%. I believe the implementation of it is less possible. Although NBG possesses number of monetary tools, if fiscal policy continues to influence monetary policy, desired affects will be difficult to reach.
– What mechanisms does the National Bank possess that makes real influence on inflation?
– National Bank should equal money supply to its demand. This is caused by GDP growth, legalization of shadow economics, growth of investment, foreign currency inflow etc. it should apply double monetary investments, deposit certificates, one day credit and deposit mechanisms, swap type operations and other tools. But when internal and foreign factors greatly affect inflation indicator National Bank alone can not overcome inflation problem. so ministry of finance as well as government should support and encourage it in order to decrease expenditure policy and administrating prices’ influence on inflation growth. In my opinion, keeping 8% inflation level is not possible. That is why we should face reality and we should change 8% target into two figures that should be scientifically proved by means of applying methodic.