Georgia's central bank sees low inflation, more reserves

10 Aug, 2004

Cash-strapped Georgia will pursue a tight money policy aimed at keeping down inflation while currency reserves are seen rising to some $300 million by the end of 2004, the central bank chief said on Monday.
"Keeping inflation low is one of the national bank's priorities ... If the lari currency were not getting stronger, inflation would be much higher on account of rapid growth in the money supply," Irakly Managadze told Reuters in an interview.
Georgia's Economy Minister Kakha Bendukidze, who took up his post earlier this year after spending his entire adult life in Russia where he became a prominent businessman, said recently lari strengthening was hurting economic growth.
But Managadze said he was not so concerned.
"I consider all the fuss about the strengthening of the national currency is not serious," Managadze said.
The lari's average rate against the dollar in recent weeks was 1.85-1.92, far stronger than the average annual rate of 2.1 forecast in the 2004 budget.
Managadze said consumer prices actually fell 0.8 percent in the first half of the year and deflation was now running at an annual rate in the year to June of 3.6 percent.
Currency reserves rose to $285.4 million by August 1 from $190.9 million on January 1, 2004, he said, adding they could rise further to about $300 million by the end of the year.
He said a resumption of lending by Georgia's main creditor, the International Monetary Fund, which recently agreed a new three-year programme worth about $144 million, had already boosted reserves.
Georgia, a prosperous tourist destination and wine producer under Soviet rule, has never fully recovered from the economic collapse that came with independence in 1991.
Per capita income is only $730 in this Caucasian nation of 4.6 million people on Russia's south-eastern border.
A culture of endemic corruption and cronyism under veteran leader Eduard Shevardnadze, ousted last year by a wave of popular protests which paved the way for Mikhail Saakashvili's election triumph, scared off investors and sapped confidence.
Other international creditors and donors have promised about $1 billion to Georgia in foreign aid.
Managadze said the central bank had also been successful in buying hard currency reserves on the open market in 2004 without destabilising the lari, which was effectively devalued in 1998 following the Russian financial crisis.
The bank bought about $100 million between January and August 2004 on the local market in comparison with $45 million in the whole of last year.
The central bank chief said the country's banks were flourishing and said some foreign banks had expressed interest in investing in Georgian banks.
Bank deposits, measured by local currency, rose 62.5 percent in the first seven months of the year while foreign currency deposits were up 25.4 percent.
"We understand that Russia's Vneshtorgbank would like to acquire a stake in United Georgian Bank," Managadze said, but did not elaborate. Sources at the bank, Georgia's largest by assets, said Vneshtorgbank may acquire up to 50 percent of the bank.
"The arrival of new participants in the Georgian market will help stimulate consolidation of the banking industry," said Managadze.

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