Between credit crunch and inflation squeeze
27 January, 2011
Between credit crunch and inflation squeeze

With the inflation rate exceeding 11% at the moment, Georgian government targets at 5% economic growth and at one-digit inflation rate this year. Economic experts find scarcely possible one-digit inflation target this year and fear that only inflation squeeze-oriented fiscal policy will end up by business squeeze.
Georgia suffers of inflation fever caused by the international market price hike and the internal problems alike. To extinguish the fever, the N

ational Bank of Georgia (NBG) toughened its monetary policy once again at the Monetary Policy Committee (MPC) meeting on January 18, 2011. If the inflation pressure prevails, NBG does not rule out further toughening of its policy that worries economic experts and business.
According to Giorgi Kadagidze, Presidnet of NBG, the key challenge to the NBG this year will be to ensure 5% economic growth of the country against the backdrop of one-digit inflation rate standing at about 6% by the end-year. That was the reason the NBG undertook stronger monetary-fiscal policy during the last six months: it increased the requirement for liquidity coefficient, increased the main policy rate, and at its last meeting on January 18, 2011 the Monetary Policy Committee increased the reserve requirements for foreign currency liabilities gradually up to 15% by this coming February 17. The first stage involves the increase of the ratio to 10% starting January 20, 2011.
Main Policy Rate (the refinancing rate) remained unchanged at 7.5% at the moment. However if the inflation pressure does not reduce NBG does not rule out to increase the main policy rate too.
According to official statistics annual inflation reached 11.2% by the end of 2010 and trends to go higher [however economic experts presume that the real inflation rate is much higher than the officially reported 11.2% even today] as prices on goods substantial for human life increase each day since 2011 started.
Inflation rate reached 12% in 2008 but it was not as acute as today economic analysts worry for the major part of that 12% was made by increase of prices at real estate market and other non-edible product while today more than 90% of inflation is made by food product essential for subsistence.
According to NBG, the contribution of food in total Consumer Price Index (CPI) growth was around 9.5% and the food inflation feeds to higher inflation expectations. According to the forecasts, high inflation will hold during first months of the year and then start decreasing.
To find out pundits’ opinion and solution of the problem Kadagidze met economic analysts on January 21, 2011. 
Economic analysts approved the NBG policy at large as fear that a social explosion may occur if inflation pressure goes higher than 12% this year although  warn that only NBG cannot discharge the aggravated situation and  governmental support is essential.
Experts almost unanimously hail government to act in concert with the NBG and cut down unreasonable budgetary expenses as well as work out economic program aimed at agriculture support so as that by 80% import-dependent Georgia could produce product locally.
Economic think tanks fear that otherwise the NBG will be forced to more tighten the fiscal policy that will entail credit crunch and stagnation of the economy.
After credit crunch of 2008-2009 in 2010 banks increased crediting of the economy by 20% as soon as  country could bottom out the financial crisis and now too stringent NBG requirement can badly affect this positive trend.
According to Zurab Gvasalia, President of Association of Banks of Georgia, due to the recently increased requirements for foreign currency liabilities banks have to attract additional USD 500 million to be able to implement their plans and not cut down loan portfolios. Otherwise banks have to shrink loan portfolios to meet the NBG requirement that inevitably cause a credit crunch.
“We have to be very careful that by strengthening monetary policy not to kill the business. The post-crisis situation is very fragile. We frequently faced seasonal inflations but now the problem we face is that price hike will resist during the entire year [as prices at international markets increase]. Tightening of the NBG fiscal policy has already gave its minimal results connected with economic growth problem and if NBG undertakes stronger policy economic growth will be a zero. We have to keep balance between economic growth and inflation.  Inflation is a very acute social issue but we should not sacrifice economic growth to it,” Emzar Jgerenaia, an economic analyst, told Georgian Journal.
According to him, the NBG has already sufficiently tightened policy and makes due steps to raise money through deposit certificates and further tightening is a no-no.
“I do not agree with the increase of reserve requirements for foreign currency liabilities to 15%, 10% could be optimal today, because the higher this figure the more expensive is banking resource at the market what means to leave business without money and liquidity once more, we should to stick to golden mean and undertake a governmental anti-inflation program part of which will be reduction of state expenses and support of agriculture,” Jgerenaia said.
Merab Kakulia, an economic analyst, finds that one-digit inflation target is unrealistic in near future for it can be achieved only through sharp tightening the monetary-fiscal policy  that is dangerous today when  economy just bottomed out recession in 2010.
“There are some positive moves [in the economy] and now to make fiscal policy very strong that will trigger credit crunch will not be a proper approach. I think that NBG has been undertaking due steps by gradual tightening of its policy. They increased reserve requirements recently and now will be closely monitoring the trend and if it cannot make positive effect and inflation pressure increases it will be inevitable to increase the policy rate,” he told GJ adding that government has to join efforts with the NBG and cut down unreasonable budgetary outlays.
The NBG assures that the 90% of the inflation are caused by exogenous factors as food prices sour at international markets. Kakulia believes that exogenous factor is only a part of the problem. Another part of inflation pressures is increase of money aggregates at Georgian market. He presumes that theses aggregates weakened by the end of the past year and expects decreases of inflation pressure in the first half of this year.
Demur Giorkhelidze, an economic analyst, believes that apart of international market trends the inflation pressure is aggravated by monopolization of Georgian market where products essential for daily subsistence are imported by big influential groups that face no legislative restrictions. 
Government has not aired any anti-inflation program as of yet. The only anti-inflation remedy they spoke of was in December of 2010 when Nika Gilauri, Prime Minister of Georgia, promised to deliver GEL 20 worth vouchers per family starting February of 2011 [if government approves this initiative] that must cover bills for consumer electricity.
“Of course it cannot solve the problem but we will somewhat alleviate population,” Gilauri said on December 24, 2010.

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