Identifier
Created
Classification
Origin
07TBILISI1140
2007-05-15 14:11:00
CONFIDENTIAL
Embassy Tbilisi
Cable title:  

GEORGIA'S CENTRAL BANK GOVERNOR UNDER FIRE

Tags:  PGOV EFIN GG 
pdf how-to read a cable
VZCZCXRO5745
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSI #1140/01 1351411
ZNY CCCCC ZZH
R 151411Z MAY 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 6355
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 001140 

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EB/IFD/OMA
COMMERCE FOR 4231 DANICA STARKS
TREASURY FOR OIA

E.O. 12958: DECL: 05/16/2017
TAGS: PGOV EFIN GG
SUBJECT: GEORGIA'S CENTRAL BANK GOVERNOR UNDER FIRE

REF: TBILISI 1065

Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d).

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 001140

SIPDIS

SIPDIS

STATE FOR EUR/CARC AND EB/IFD/OMA
COMMERCE FOR 4231 DANICA STARKS
TREASURY FOR OIA

E.O. 12958: DECL: 05/16/2017
TAGS: PGOV EFIN GG
SUBJECT: GEORGIA'S CENTRAL BANK GOVERNOR UNDER FIRE

REF: TBILISI 1065

Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d).


1. (C) Summary: Roman Gotsiridze, the president of the
National Bank of Georgia (NBG),Georgia's central bank, came
under withering criticism in Parliament after he presented
the Bank's annual report on May 10. Parliamentary criticism
reflected a less than exact understanding of the interplay
between the causes of inflation and the reasons for the
continuing pressure for appreciation of the lari. However,
it did indicate a weakening of Gotsiridze's heretofore
relatively secure position at the head of the central bank,
which he has maintained despite some real questions, by real
experts, as to his ability to manage the country's monetary
policy. The NBG's report must be approved by Parliament. If
Parliament fails to do so, it may trigger Gotsiridze's
resignation or removal. End Summary.


2. (SBU) The Chairman of the Parliamentary budget committee,
Irakli Kovzanadze, took issue with the NBG annual report's
conclusion that inflation (8.8 percent in 2006) is mainly due
to "external factors" including the Russian embargo and
rising prices for energy. The influential Speaker of the
Parliament, Nino Burjanadze, expressed her disapproval of his
performance as well. Gotsiridze defended himself, saying
that "no one could prevent inflation when there has been a
fourfold increase in gas prices since 2005."


3. (SBU) Besides inflation, Kovzanadze also questioned the
NBG's recent more relaxed attitude toward appreciation of the
lari, which is to a large extent driven by inflows of foreign
investment, such as last year's successful USD 150 million
stock offering on the London Stock Exchange by the Bank of
Georgia (a commercial bank, not to be confused with the NBG).
However, fighting both inflation and currency appreciation
at the same time is a difficult trick for any central bank.
A tighter money policy, designed to attack inflation, tends
to put upward pressure on the currency as the supply of
domestic exchange is reduced. Thus, the IMF has counseled
the NBG to be more flexible regarding the lari. The IMF has

also pointed out to the GOG more than once that increases in
government spending also tend to push up inflation, and
suggested that excess revenues go to reduce indebtedness. It
is Kovzanadze's Parliament that approved two supplemental
budgets in 2006 and is looking at another one now that will
increase overall spending by 20 percent over 2006 in 2007
(reftel).


4. (C) What experts have found wrong with Gotsiridze's
leadership is his failure to support creation of effective
tools for managing Georgia's money supply. The NBG has begun
packaging government securities into marketable bonds, but
has been reluctant to offer interest rates high enough on
them to attract the interest of commercial banks without
sweeteners -- such as the exchange of the Bank of Georgia's
entire proceeds from its IPO in London in return for its
purchase of bonds at lower rates than it would otherwise
accept. The amount of such securities that the bank has been
offering is rather small to affect the money supply in a
meaningful way. Besides bonds, the bank is also marketing
its own certificates of deposit (CD's). It has begun to
offer rates that are making the CD program more effective.
The NBG needs to take a more pragmatic approach to pricing
its securities and CD's in order to manage the currency
inflows the government is expecting, including the likely
prospect of USD 132 million from the sale of UEDC to the
Czech company Energo Pro. Gotsiridze has been slow to
recognize that the real purpose of open market operations is
promoting price stability and fighting inflation, not making
a profit on his portfolio.


5. (SBU) On a more optimistic note, after a visit to the New
York Federal Reserve Bank in April by many of its members,
the NBG board took the New York Fed's recommendation and is
introducing a new reserve requirement policy. The NBG's
policy is aimed at encouraging a more proactive approach from
commercial banks in their reserve management operations. It
is the first step towards creating a fully functioning
inter-bank market in Georgia and will make the development of
a fully functional open market desk at the NBG much easier.
The new policy will begin to be implemented in May and all
new requirements will be mandatory on January 1, 2008. The
NBG is working now to familiarize the banks with its new
policy.


6. (C) April 2007 monthly inflation was 0.3 percent, which

TBILISI 00001140 002 OF 002


brought twelve-month inflation ending April 2007 to 8.11
percent, compared to 9.72 percent for the twelve months
ending in March. Even though reported inflation has now
dropped to a less troublesome level, it continues to be at a
level requiring more effective tools in the hands of the NBG,
and more responsibility for inflation must be accepted at the
Ministry of Finance for the Government's relatively loose
fiscal policies. There is enough blame to go around. The
public and parliamentary focus now seems to be on Gotsiridze,
although perhaps not for the right reasons.
TEFFT