Super-Profit in Banks Indicates Deflation
28 March, 2013
Super-Profit in Banks Indicates Deflation
Ten-fold increased profit in Georgian banking sector in January-February of 2013 indicates ongoing dangerous deflation process dragging Georgia into economic depression.
Profit of Georgian banking sector in first two months of this year exceeded GEL 42 million that translates into more then 10-fold higher profit compared to the profit of similar period of 2012, making around GEL 4.6 million. The figure looks amazing against the background of the drop of GEL 20 million
in banking incomes plus deteriorated economic picture in the country at large: dwindling investment inflows, slowed businesses, lower demand on loans, reduced annual GDP figure and pessimistic prognosis of economic analysts predicting a new tide of crisis in prospect. Zurab Gvasalia, Head of Association of Georgian Banks [as reported by Commersant. ge media portal] believes banks owe the ten-fold-higher profit in this past two-months to increased activity of the small and medium business that inclines him to be optimistic over economic picture of the country this year. As a matter of fact, the first months of the year are relatively passive the global practice shows and once January-February of 2013 turned out so successful the coming months are expected to be only better.
“Banking sector cannot be active independently without the business activity,” he said and stressed that although the banking sector started the year of 2012 by losses, it closed the year by GEL 134 million of profit and by GEL 107 million bigger share capital. Economic analysts meantime believe that the banks super-profit bespeaks of ongoing deflation process dragging the country into economic depression rather than of growth and success in any sector. According to Lia Eliava, the alleged ten-fold growth in banking sector is simply an anti-deflation policy that prunes expenses by suspension of business project development and firing the labor force.
“If we zoom in the banks’ statistic data, it will be obvious that the sector shrunk in fact as their incomes dwindled by GEL 20 million in January-February of this year compared to similar period of 2012 [from GEL 367 million to 347 million] and the so-called high profit is a result of reduced outlays. Banks cut down expenses by almost GEL 57 million [from over GEL 358 million in the similar period of 2012 to approximately GEL 301 million this year] to combat the ongoing deflation process that is already on the scene and very likely will aggravate as the National Bank of Georgia (NBG) cannot keep the inflation rate at the targeted 6% level,” Eliava told Georgian Journal.
As a matter of fact the average inflation rate stands at -2.1% in Georgia at the moment. It fell below zero several months ago for that ex-power said many thanks to the NBG as it managed to escape inflation blaze. Now the country faces the deflation that, as analysts warn, bears much more dangerous risks than inflation. Deflation may plunge the country in deep economic depression when prices and consumer demand slump likewise, businesses shut down or try to survive by cutting down outlays on the expense of lowered business activity and the firing of the workforce thus triggering unemployment rate up.
“The US has been struggling with the possible deflation for the past decade by pouring as much money as possible into its economy to raise its dropping inflation rate so as not to fall below zero but to no tangible effect as of yet; however, Georgian central bank, due to its inadequate monetary policy, contrived to let the inflation slip below zero in several months while there was no precondition for that in the country,” Eliava elaborated. “Targeting on 6% of inflation rate means that the rate must float around 6%, not drop below the par.” Ditrich Muller, co-founder of Georgian Investment Group, also spots anti-deflation remedies in the alleged super-profit that banks faced recently. He warns to take deflation seriously and blames the NBG for artificially holding the exchange rate of Georgian national currency up that led to deflation as an aftermath.

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