Publication: Eurasia Daily Monitor Volume: 3 Issue: 163

The International Monetary Fund (IMF) has warned the Georgian government to curb the country’s creeping inflation. The admonition has provided evidence that the country’s actual economic situation significantly differs from the government’s rosy pronouncements. Since the beginning of 2006, the government has continuously touted impressive economic achievements (see EDM, February 15), including the creation of new jobs, over 30,000 new enterprises, and an 8.4% increase in GDP for the first quarter of 2006, compared to 5.4% in the first quarter of 2005.

The IMF mission visited Tbilisi August 11-18 to assess recent economic developments. Members sternly warned the Georgian government to trim inflation from the current 14.5% to 10% by the end of 2006 and to gradually reduce the double-digit inflation rate to the 5-6% target set in the 2006 state budget. While acknowledging Georgia’s economic growth, the IMF nevertheless emphasized the “significant inflationary pressure” posing “a serious risk to macroeconomic stability.” The IMF’s investigation concluded that the sudden rise in the inflation rate — from 6% at the end of April to 14.5% at the end of July — was the result of the excess money supply in the country. The IMF team called on the government to restrain its expenditures.

The National Bank of Georgia (NBG) waited until July 1 to inform the media of the 10% inflation rate first registered in May. NBG President Roman Gotsiridze attributed the accelerating inflation rate to increased gas and electricity prices and negative external factors. When parliament studied the draft 2006 state budget in December 2005, Gotsiridze had assured lawmakers that NBG would not allow double-digit inflation rates in 2006. Inflation was around 6.2% in 2005.

The rising cost of living and the falling purchasing power of the lari have prompted concerns that the Georgian currency might share the fate of its predecessor, the “coupon,” which rapidly depreciated in 1993-95. Some analysts believe inflation has already reached 20% and accuse the government of concealing this fact to avoid public disappointment ahead of local elections this fall. The inflationary processes have reportedly frightened many private depositors at Georgia’s commercial banks.

Analysts are skeptical about the efficacy of the securities that which the National Bank plans to issue to curb inflation by removing surplus money from the market, which was a result of the Finance Ministry’s spendthrift policy. David Amaglobeli, NBG vice-president, has brushed off talk of further inflation and depreciation of the lari. Amaglobeli, however, admitted that more coordinated work between the NBG and the government, as well as consistency between fiscal and monetary policies, is necessary to avoid a deterioration of macroeconomic stability in the country.

Symptomatically, on July 25, shortly before the IMF delegation’s visit, parliament approved government-proposed amendments to the 2006 state budget that increased expenditures by GEL 323 million ($182.3 million) against the planned GEL 77 million ($43.5 million). The bulk of this sum — GEL 212.5 million (about $120 million) — will be allocated to the Defense Ministry, which has propelled Georgia to world-class levels thanks to increased defense spending, according to the Stockholm International Peace Research Institute.

Many analysts saw political motives behind the spending and predict further inflation hikes, given the rising expenses for the ruling party’s election campaign, which reportedly is largely financed from the state budget. For example, the government allocated GEL 26 million ($15 million) for a government-sponsored program offering three-month internships in private businesses for at least 50,000 citizens and raised pension right before the elections. The lavish campaign started in May when the polls showed an alarming drop in the popularity of the ruling party. Moreover, in September the government plans to launch the IMF-recommended Poverty Reduction and Economic Growth Program, which will put additional money into circulation and further stimulate inflation, according to some analysts. However, the government claims that the spending will be within reasonable limits. At a special briefing on September 1, Georgian Finance Minister Alex Alexishvili claimed that inflation would return to one-digit figure by the end of 2006. “I don’t see grounds for concern,” he added.

IMF experts drew the government’s attention to the excessive movement of the exchange rate as early as February. In an interview with Civil Georgia on February 15 John Wakeman-Linn, IMF Mission Chief, said: “The exchange rates right now are significantly below what we consider their equilibrium, their normal level.” He called for a “real appreciation” of the exchange rate in Georgia. Perhaps that was a comment on the government’s attempt to prevent inflation by artificially strengthening the Georgian lari against the U.S. dollar through foreign currency purchases and sales at the Currency Exchange. However, the government has ignored the IMF’s admonishment, because the forced weakening of the dollar against the lari has continued throughout the past nine months.

The Georgian business and investment climate continues to be harassed by “crony capitalism” and restrictions placed on businesses by authorities, which ultimately leads to stagnant economic development. The frequent politicizing of economic decisions and strained economic relations with Russia have brought Georgia alarmingly close to economic crisis.

The manpower and brain drains, reliable indicators of economic disturbances, eased after the Rose Revolution, but they have renewed recently. Between January and June of 2006 the number of economically active Georgians was 1,952,300 against 2,350,500 for the same period of 2005, according to the State Statistics Department. President Mikheil Saakashvili must address the emerging challenges immediately and rationally (see EDM, August 9). However, in order to reorient economic development toward a healthy course Saakashvili’s government first needs to insulate the financial-economic system from political expediency.

(Moscow Times, June 30; TV-Rustavi-2, July 1; Reuters, June 12; Civil Georgia, February 16, July 2, August 19; Messenger, August 21, 24; Resonansi, August 24, September 4; Kviris Palitra, August 28, September 4)