INFLATION FALLING RAPIDLY IN GEORGIA.
Publication: Monitor Volume: 6 Issue: 124
After surging at the end of 1998 and through much of 1999, inflation has slowed rapidly in 2000. Data released in May indicate that consumer prices actually fell during February, March and April, by 0.2, 0.1 and 0.2 percent, respectively (Russian agencies, May 24). Year-on-year inflation, which was above 20 percent for much of 1999, had actually dropped to -0.2 percent in April 2000.
Georgia’s emerging deflation stems in part from base effects, as year-on-year rates in the first half of this year are measured against the accelerating inflation reported in the first half of 1999. Monthly inflation accelerated sharply between December 1998 and April 1999 due to the collapse of the lari after the August 1998 Russian financial crisis. The surge in monthly inflation caused year-on-year rates to increase from 0.5 percent in November 1998 to 20.4 percent in April 1999 (CIS Statistical Committee). Tight monetary policies and a substantial decline in Georgia’s large current account deficit then began to stabilize the exchange rate vis-a-vis the dollar in the second quarter of 1999. Monthly inflation rates therefore slowed substantially in May 1999, and remained low after mid-year. Year-on-year inflation remained above 20 percent, however, until December 1999, when it fell to 11.1 percent as the surge in inflation in December 1998 was factored in to year-on-year calculations.
While base effects have been largely responsible for the sharp drop in year-on-year inflation since December 1999, the monthly deflation in February, March, and April of this year very likely stems in part from seasonal effects. Georgian household consumption typically falls in the first quarter compared to the fourth quarter of the previous year, when retail sales are boosted by increased consumer spending prior to the Christmas and New Year’s holidays. Weak household spending therefore helped reduce pressures on consumer prices in the first quarter.
Georgia’s on-going fiscal crisis may also be contributing to the slowdown in inflation this year. Delays in the passage of the 2000 budget (which did not occur until March 17), combined with major revenue shortfalls, have led to continued growth in arrears on public sector wages and pensions this year. These delays are likely to have further restrained household spending and further weakened consumer prices. Although the CIS Statistical Committee reports that retail trade grew by 10 percent year-on-year in the first quarter of 2000, the declines in food and non-food prices during January-April indicate that the actual level of domestic demand in Georgia is weaker than the official retail trade data would suggest.
GEORGIA COOPERATES WITH NATO COUNTRIES.