Teams of entirely all central banks of the world are fighting against inflation; Ben Bernanke due to difficult circumstances neglects Alan Greenspan’s policy and decreases percentage rates on credit resources, tries to increase production and inflation simultaneously;
on the other hand the world market has blown up – the tendency of rising prices on food as well as on energy goods has settled, the whole world is facing inflation. Meanwhile Georgian government introduces a ‘revolutionary package’ for a discussion, the main purpose of which is to support investment, fight against inflation and reform banking system together with creation of free economic – offshore zone. Exactly, you have got it correctly. We are planning to create offshore zones in Georgia, despite difficult foreign factors (like relationships with Russia, complications regarding entering into NATO and European Union, danger concerning the world recession); due to grown inflation in the country its planned to relieve President of National Bank of Georgia off his duties. Will the Bank of all banks change various presidents and can it keep its title following the implemented reforms? Who will calculate the inflation and how will he manage it? Why will free economic zone (or offshore zone) created in Poti become an attractive place for commercial banks that are established with the support of foreign capital? What needs to be updated in National bank of Georgia? The above issues have lately become subjects of sharp discussion within Georgian economic and political circles. We have done our best to include both sides in our discussion club: those who support revolution and those who are oppose these ideas. We have also tried to show world trends. This time discussion is held by:
– Zurab Gvasalia, the president of the Association of Banks of Georgia;
– Emzar Jgerenaia, Tbilisi State University professor and Economic Expert;
– Davit Narmania, Tbilisi State University Professor and Economic Expert;
– How should Georgia become an international finance centre according to legal package on ‘Finance sector global competitiveness’?
– We should mention it from the very beginning that presented package of legal amendments is quite a big document (it includes 4 new draft laws and changes in 22 active laws). It offers number of significant changes enabling to update Georgia’s financial sector first time in the history of independent Georgia. Necessity of such an important legal and corresponding institutional changes in a country should be well grounded prom country’s further development as well as financial point of view. Unfortunately government and draft laws have more ambitions than it is suggested by Georgia’s geopolitical location or current political and economic situation. Package of the draft laws also has big ambition: namely, Georgia is to become the world’s financial centre following the implementation of the draft law. We believe it would be far better to declare that Georgia will become region’s financial centre and to use created circumstances in Armenia and Azerbaijan. In my opinion more stable finance system should have been formed based on the principles of liberalism and transparency, we should have attracted additional financial resources either for circulation or for accumulation.
– We should approach standards of international finance centers. The region has this potential and there will be a great demand on it. Although I should emphasize that creating financial centre in Georgia does not imply that we’ll be equal to London and Hong Kong.
– Due to several factors Georgia will never become a financial centre – Georgia is constantly characterized by political instability; recent events may serve as a good example of it. Therefore significant investors avoid visiting Georgia. Changes are often introduced in Georgia’s legal and normative bases that may be considered as a hampering factor as the above mentioned frequent changes indicate instability.
– Is government still proud of foreign investment volumes?
– Yes, it is. Changes introduced to Georgian state budget recently are mainly connected to the investments that investors implemented in Georgia. Due to November events getting investments have hampered and were mainly implemented by companies with the Eastern capital or registered in offshore zones. Investments have grown from 450 million to 1 billion from 2003 to 2006-2007. Their flow has stopped for now and if the same level is kept in 2008, it will be a positive result. Western, German or other perspective countries’ capital volume is modest or there is absence of it as they mainly pay attention to a country’s investment attractiveness and trust estimations provided by their experts. They do not rely on statements by some international magazines.
– According to well known international ratings and different indicators Georgia is a leading country among European states. The country is considered to have an attractive investment climate and free environment for doing business. Don’t you think it is quite enough for assuring an investor?
– The above mentioned rating will assure only small part of investors. As a rule big investor does not rely on the sources and sends his own experts to study investment climate and attractiveness of a country. The reason Georgia has this position lies in the following: number and rates of taxes has significantly decreased in Georgia that causes shifting the country on front positions in international ratings. Still, while making these estimations no one pays attention to procedural regulations, quality of business freedom or problems related to property.
– Do you mean international organizations do not pay attention to it?
– International organizations have their own methodology. Although Georgia is such a specific country that it may reduce number of taxes, implement reforms but still behind all these problems related to property may exist. Due to complicated administrative regulations doing business freely may be hampered.
– You are talking about draft law gaps, what alternative do experts suggest?
– Progressive side of the draft law is decreeing income rates from 25% to 15%. Personally I was against the decision of increasing it form 12% to 25%. Average incomes in Georgia are really low and 25% was socially unfair. The main problem is that there is a lack of declared and exact regulations in the draft law the violation of which would have causes someone’s liability. Implementation terms are also unacceptable. According to the Prime Minister’s statement, this indicator will decrease with 1% in coming years and then important changes will take place. It means that nothing is revolutionary here and even attracting investors is not serious. It’s a pure PR!
– What could National Bank of Georgia not manage? What has caused the necessity of such drastic reforms?
– National Bank of Georgia fulfilled its obligations quite well until today. But the law that entered into force in 1995 had been in action for 13 years and it needs to be changed. It should be emphasized that we are not talking about changing the constitutional status of National Bank. It will keep its status and its president will be elected to seven year terms. It is obvious that amendments should be introduced to the law on National Bank. Its functions should be divided. Part of its obligations should be related to monitoring commercial banks, the other part should be related to monetary policy – regulating prices and controlling inflation. Abroad, for instance in England, central bank does not supervise commercial banks. President of National Bank of Georgia will be the member of commercial banks’ Supervisory Board. Electing him as a chairman of the board is permitted. Director of the commercial bank’s Supervisory Board will be approved upon the nomination of the President of Georgia and will be accountable to National Bank of Georgia. Supervisory service of Banks will be one of substructures of NBG.
– Similar structure, the department, already exists at National Bank of Georgia.
– Well, it was in disorder. According to the draft law financial supervisory service is created at NBG that will include insurance sector, capital and banking sector supervision.
– Can the service be independent?
– Although there is no such a notion as holding in Georgia, but there are lots of holdings in our country. For instance, Bank of Georgia owns investment package broker companies and its own insurance company. Risks do not cross each other but there is no doubt that it is managed by a holding principle.
– All National Banks of the world have the same functions: controlling inflation, regulating economic growth and unemployment. National bank is a central bank in all countries of the world but regulating bodies are separate and independent everywhere. There are several regulating bodies in the US; functions are divided among several bodies in England. United regulated bodies have been formed in Poland; the situation is the same in Russia. The world has already formed the following trend: National Bank is not responsible for regulating commercial banks. Commercial bank should be established as joint stock companies, it is necessary according to law on entrepreneurship and law on National Bank, but several licenses regarding banking activity are requested. All licenses are issued by the state regulating body. Regulating body constantly controls commercial banks, checks the adequacy of its capital, estimates assets and liabilities etc,. Control of all parameters is made by regulating body – Banks’ supervisory department of National Bank. this amendment is implemented at National Bank, although some of the functions are vague: for instance who determines the level of currency resources; another misunderstanding – president of National Bank becomes a member of regulation board and at the same time he may be the chairman of the Board while the regulating body is accountable to National Bank being responsible for regulating body’s mistakes. It turns out that functions of National Bank increase and become even more powerful. In my opinion the reform should be scheduled well and changes should be made step by step.
– I believe separating supervisory service from National Bank does not weaken the latter. . Supervising may be separate and it may even be better for a system of finance. Still, national Bank had many other functions like issuing licenses. Therefore, there is a threat that National Bank will turn into an ordinary bank serving Georgian government. Still there is one issue that needs to be controlled by NBG – regulating inflation. President of National Bank becomes responsible for a simple indicator inflation. As a result, the whole responsibility is put on a single person and a threat emerges: he may try to keep inflation indicator by means of various manipulations in order to avoid responsibility. Entire body should be accountable regarding inflation. The draft law does not indicate the reason why National Bank should be responsible for inflation growth caused by foreign factors.
– Is the joint regulation body submitted to National Bank according to law?
– It is accountable towards National Bank, is financially supported by it and the president is a member of Supervisory Board. Decision on electing a chairman should be made independently by the Board.
– What will the management form be like?
– There will be a Board and Directors.
– Is it theoretically possible that the president of National bank becomes a chairman of a supervisory board?
– Yes, it is possible. He may also be the head of supervisory board at National Bank.
– Will the president of National Bank be a decision maker in case he is not the chairman of supervisory board?
– Yes, he will be.
– In case financial regulations do not meet corresponding demands, is the president of National Bank responsible?
– Of curse he is responsible. The whole idea of the reform implies that a separate structure being oriented on a single issue is created and is not responsible for inflation indicator.
– The president of National Bank is responsible instead.
– President of National Bank is a member of Supervisory Board. In case supervisory service takes wrong decisions he has the opportunity to change it. He may write an open letter to the president, who appoints Director of Supervisory Board.
– Imposing such a significant responsibility on a single person is unacceptable. Accountability should be shared within entire system; otherwise head of National Bank will constantly attempt to affirm desired indicators of inflation in order to avoid corresponding liabilities. On the other hand some foreign events may cause high inflation and it may not be related to the president of National Bank.
– What does the law take out of law on National Bank
– Nothing. Law on National Bank will include information on Supervisory Board. Introducing a foreign Board member is a supervisory regulator is connected to certain difficulties. We may invite a specialist, like they did in Israel – Stanley Fisher, but it is quite expensive. Besides, in case we invite foreign specialists, we’ll need to translate all materials. An expert may make an influence and is a full fledge member of the Supervisory Board. therefore inviting an expert is a different issue.
– As you state, National Bank’s rights increase
– Of course. Insurance market, capital and banks become submitted to it. National Bank could not affect risks before that were created by existence of insurance companies, as banks insured issued loans at their own insurance companies.
– Why does a society discuss the issue of abolishing National bank?
– Well, I can not say exactly. Credit centre remains at National Bank and all commercial banks will have corresponding accounts there. Cash centre remains at National Bank as well till certain period of time, although a new project enables to form a separate booking centre, near the US Embassy. National Bank of Georgia keeps the sole right to issue money. As for responsibilities: National Bank carries no liability regarding budget spending and giving incorrect promises from the side of government.
– Will the president of NBG be relieved off his/her duties in case of 12% inflation?
– National Bank should schedule inflation to 12% on its own. It may state that inflation will be 8-9 or 10% but it should manage to keep it. In case government’s wrong policy causes the inflation rate growth, the Bank may declare about it.
– What will the outcome be?
– In this case National Bank is free of responsibility. It will be clear for everyone that inflation was caused by government’s wrong policy. President of National Bank quite often tired to hide it, especially if he was subjective and had obligations.
– In case president of National Bank does not make the statement on government’s wrong policy, will he be automatically dismissed?
– This time he will be considered to be blamed. He confirms it with his silence.
– Does the government free itself from liability and impose it on the president of National Bank?
– Of course it does. Georgian government’s obligations are not indicated anywhere. Coordination between the Ministry of Finance and national Bank is absolutely necessary although their functions should be well distinguished.
– Who imposes the responsibility?
– The law does.
– Well, following your answer a question rises – who calculates inflation?
– Department of Statistics is closely related to the Ministry of Economics and to politics as well; chooses the calculation method upon its own wish and results in desirable figures. Therefore, Georgian Prime Minister Lado Gurgenidze stated that he will present high quality independence draft law on the department of statistics in three month. According to the Prime Minister its independence level will be quite high, calculation method will cause no disagreement.
– The first part is how the department of statistics calculates; the other part is the institutional one. It does not really matter whether it is submitted to President or Prime Minister if it is not independent. The third – political part. Political culture should be high and 2+2 should equal 4. There are certain types of food in a basket, like caviar, that has the same stable price. Increased price on buckwheat that cost only 20 tetri is a serious inflation. the basket is not affective and therefore the world has invented core inflation. GDP indicators are also rough. The world had a trouble regarding it as well. It is really important to know what we calculate and count. Gold costs 1000 USD although according to calculation of statistics department its price was 1800 in 1977. Composed and compared prices are significant notions.
– How was the law prepared?
– The framework of the law existed although it was principally different from this one. It contained necessary and important amendments for someone – the part that was quickly taken from the law. Someone may ask why I care so much on NBG. I believe National Bank is my partner; we oppose each other with the best meaning of this word. But I need a strong partner, not a depressed National Bank and it frightened president, being unable to solve problems. While meeting with Mr. Noghaideli, I constantly claimed that one can not give a salary of Supervisory Board from a net income to Banks; all of us are registered under law on entrepreneurship. Salary is expenditure, as members of supervisory board participate in creating wealth, but the sentence ‘except for commercial banks’ – was put in a quotation marks in the law. Leaving incorrect records in the law is not permitted. It is possible in theory that inflation does not exceed 12%, that president keeps 12% inflation rate and ruins country’s economy. One can not make the president of National bank legally obliged, as inflation is kept. Anyway, it will take a long time to improve outcomes. In case external factors are strong (like war in Iraq, Russian crisis etc.,) then President of National Bank is powerless. Mortgage crisis has moved from America and it will definitely come up to us as well. If we look through banking sector credit portfolio, with the major share of foreign credits, more than 3 billion out of 4,5 billions, it is important what our integrity is with European and the US markets, as crisis will be proportional. There is no doubt that credit percentage will rise. There is also one significant problem – there are no professional estimators of property in Georgia. Together with the land owner’s association we are working on a project according to which there will be licensed people making right evaluations. The market is not properly studied and risks are quite high. We have given unlimited responsibility to audit by means of agreement, while going to a bank or a Joint stock company he/she writes conclusions on the basis of provided documentation and is responsible within its framework.
– The world trends are sharper –National Bank functions are clearly distinguished from the regulating functions. England is the only exception, although this traditional country will soon form the same trend. Still, we have given the regulation function to the National bank, what is the reason of it?
– National bank should always be informed. It is not its monetary function. While forming monitoring service Ministry of Internal Affairs, Ministry of Finance and Prosecutors office stated that the service should have been formed under them but Financial monitoring service will be created with supervising service.
– Do you oppose the idea of creating regulating body under National Bank?
– Creating a financial supervisory agency under NBG from legal point of view it is vague and lawyers should well discuss. The reason of creating public law entity in addition to another public law entity having no organizational connection to National Bank is a bi difficult to understand.
– Are not they responsible to the National Bank?
– No, as it is an independent body.
– What are the world trends from this point of view?
– It is independent everywhere.
– Who issues the license on opening or closing a commercial bank, who assigns temporary administration order and who defines necessary reserves?
– Regulating body.
– Then what other sources are left to National bank in fighting against inflation and unemployment?
– It has the function of controlling monetary masses; it may take monetary masses and put it into economy or use it according to necessity. According to presented draft laws functions of the National Bank are changed again, being approved by constitution and organic law. National Bank is one of the most important financial institutions of a country. It should be an independent unit, the government should take a permission on using and spending money from the ministry of finance as if the latter puts a great amount of money into country’s economy (as it usually happens at pre election period) it will cause increased prices and president of National Bank is responsible for it instead of the ministry of finance. NBG has been an independent in its activities for years and it successfully implemented fiscal and monetary policy of the country. Competitiveness among commercial banks as well as their successful activities in Georgia is directly related to NBG. Introduced changes in The Organic Law of Georgia on the National Bank of Georgia somehow limit the bank’s independence. (Changes are so drastic that they are like a new version of the law). Item ‘2 b’ in second article of the new draft law may serve as a good example. According to it NBG should own, save and use official international reserves and special funds created by government according to the decision made by the government. The independent body formed on the basis of Organic Law may not be obliged to execute any order of the government resolution that is a document with a lower hierarchy. National Bank may operate in coordination with the government but not be subordinated to it.
The same regulation is the third item in the same article according to which ‘NBG on the basis of managing stable development fund approved by the government manages the stable development fund’.
– National Bank keeps treasury liabilities, deposit certificates.
– Are deposit certificates developed well in Georgia? Is NBG left without financial ?
– Secondary market was not developed in Georgia, therefore commercial banks did not find it attractive to take treasury liabilities and deposit certificates to secondary market. duties are high. Nowadays both are free of duties at secondary market.
– Is National Bank a strong decision maker at a financial market?
– It owns all types of means for that.
– Deposit certificate market is not well developed in Georgia. The situation was poor in this sphere till 2003. Since then it has started to develop. National Bank does not have developed financial means and is not a decision maker. The same is true regarding the credit market. Credit investment of our banks is USD 4.5 million and more than 70% of it is of foreign origin; therefore NBG can not use this mechanism. It can neither increase nor reduce prices on credit resources. Low prices on credit sources support the development of production, although on the other hand it raises inflation risk. Expensive credit sources hamper economic growth followed by grown inflation and unemployment indicators.
All central banks are involved in this fight abroad. The same is not true with Georgia. NBG controlled significant parameters of commercial bank. Monetary and credit policy of NBG can not be positively estimated up to date. Its also true that depositors have not faces special challenges for the last 7-8 years but monetary and credit policy was not at relevant position. GEL exchange rate towards USD is quite strong and we use it for stopping inflation. Prices on food, wheat have sharply increased the world market and it is quite well reflected on Georgian market as well. we have cheap import, high GEL rate, cheap import catches expensive prices- this is the way, the wrong one, we attempt to regulate inflation. Import is cheaper causing troubles to export.
– Don’t you think it would have been better to schedule the reform? Is NBG ready to become liable for inflation in a few months?
– I find it difficult to give you an answer. Perhaps there is no straight answer to your question. Georgian Prime Minister states that he has decided to attract investments of USD 10 billion. Georgia needed legislative basis for that.
– The draft law deals with stock exchange competitiveness as well. What is the situation like on Georgian stock exchanges? What does the draft law suggest them?
– It’s a bit painful issue since there is just one stock exchange in Georgia with only modest agreements. Most agreements are concluded independently. Any step forward in this sphere should be appreciated. Anyway, I personally find it difficult to imagine that special additional stock exchanges created by the government support stock market. Stock exchanges should develop on the basis of free market, without intervention. Business climate should be quite attractive for a JSC that will automatically support stock exchange agreements. Developing a country implies the development of a stock exchange. I believe these types of draft laws should not be adopted in a hurry. They should be well discussed and analyzed. Law on National Bank of Georgia is entirely changing, and in my opinion it would have been better if they adopted a new law on National Bank of Georgia. It has been declared that NBG status does not change as it is approved by the constitution. Accordingly, if the constitution approves National Bank, we should not introduce amendments to other laws that will take certain functions from NBG. Functions are changed, as I have mentioned, Free industrial zone is being created in Poti, two non-budgetary funds are created, certain things are not transparent regarding them in the draft law: what will be their management, who are they responsible to. The draft law was made up of specialists from different spheres and the whole package was not overviewed. Certain issues oppose each other and they are quite poorly explained.
– Its time we turn NBG into a strong gamer. Its time the bank becomes a real regulator of inflation and unemployment. When information on creating Poti free economic zone was spread members of Georgian government emphasized the title itself. They excluded the possibility of creating an industrial zone as well as financial activities in the zone. Privileges given to banks created on the basis of foreign capital was also declared.
– If the companies created in free economic zone used the serve of Georgian banks, it would have been more transparent process and would have developed Georgian banking system as well as bring more profit to the country.
– Georgian banks are also allowed to use privileges; it is not prohibited if a Georgian bank has a foreign capital.
– Investment flow has stopped following the November events in the country. 2008 is an election year that causes lack of investment. Main flow goes to banking capital. Banking market is growing and it is risky. Monetary and credit policy should drastically change nowadays, it should be directed to inflation regulation and production growth rate; it is the hardest task for all central banks of the world.
– What amendments will be introduced in the law on entrepreneurs?
– It becomes more liberal. Well, in my opinion it requires total change as the law was created in 1994 and approaches since then have greatly changed.
– What kind of revolution will be the outcome of the ‘revolutionary package’?
– Rules of game will be entirely changed in Georgia. Free industrial zone will lead to a number of changes. Man managing circle will consist of foreign companies, local people will mainly be presented as servants. the role of National Bank changes, Supervisory service becomes stronger. as a result we’ll have relatively liberal environment for entrepreneurship.
It is difficult to draw conclusions! One thing is obvious: National bank of Georgia was relaxed till today and did nothing. Form this day on it will have to take a good care of economy, inflation, economic growth and unemployment. I think it’s a new job for NBG. Someone else will have to continue its major activity- control of international monetary fund targets and revision of commercial banks. We’ll see how close NBG i