IMF SEES SLOWER GROWTH, HIGHER INFLATION AND

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 003036 SIPDIS SIPDIS STATE FOR EUR/CARC AND EEB/IFD/OMA E.O. 12958: DECL: 12/06/2017 TAGS: ECON EFIN PGOV GG SUBJECT: IMF SEES SLOWER GROWTH, HIGHER INFLATION AND GOVERNMENT DEFICIT FOLLOWING GEORGIA POLITICAL CRISIS REF: TBILISI 2978 Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d). INFLATION UP, GROWTH DOWN SOME -------------- ¶1. (C) Robert Christiansen, the IMF's resident representative in Georgia, told the Ambassador on December 5 that the uncertainty arising from the current government crisis has caused foreign investors to put their plans for investing in Georgia on hold, but not necessarily to cancel them entirely. As a result, growth in 2007 will likely be one to two percent less than the 12.5 percent the IMF had been forecasting. He said that the government's budget for 2008 is conservative and forecasts only 5.5% growth in GDP in ¶2008. Christiansen said that the government is spending money at a greatly accellerated rate ("like a drunken sailor") and as a result the 2007 overall budget deficit is expected to be five percent of GDP and inflation, running at 11.7 percent year on year in November, will finish at 12 percent for 2007. He expects inflation will be even higher next year. ¶2. (C) With a presidential election planned for January 2008, new Prime Minister Lado Gurgenidze can do little about spending in 2007. However, Christiansen said that Gurgenidze wants to cut the government's spending in 2008 as much as possible. The PM's chances of success in that effort depend on when the parliamentary elections will be held in 2008. If the campaign period extends nine months, until Fall 2008, it will be difficult to contain spending, he said. Christiansen said that Gurgenidze has told him he will encourage the National Bank of Georgia to raise interest rates and allow the lari to appreciate further. Christiansen deems both measures appropriate to fight inflation. He observed that the government must be careful not to raise interest rates too much, because this will attract foreign deposits that will exacerbate inflationary tendencies. PLANS FOR CONTINUED REFORM -------------- ¶3. (C) Christiansen said that Prime Minister Lado Gurgenidze's background in banking gives him an excellent grasp of economic issues. The Prime Minister has formed a working group within the cabinet, including State Minister for Reforms Kakha Bendukidze and Minister of Finance Nika Gilauri in order to generate a nucleus of consensus on economic topics. If he remains as Prime Minister after a Saakashvili win, Gurgenidze has told Christiansen, he will have the government take a number of important, positive steps early in the year. These include strengthening the banking system, the judiciary and the tax system. All will be important to reassure and re-attract investors. Christiansen said that although the government has made significant reforms on paper, there is still a great need to make it easier in reality to do business in Georgia. Another task for early 2008 is finding a new president for the NBG. Christiansen thinks the current acting president, David Amaglobeli, is the best choice for the job. STANDARD BANK TAKEOVER -------------- ¶4. (C) Christiansen said that the NBG's imposition of temporary administration on Standard Bank, controlled by Badri Patarkatsishvili (reftel),was justified by significant withdrawals after the November 7 events. The bank's management was "burning through cash at a rapid rate", he said. But Christiansen also saw some truth in the claims that withdrawals were attributable to nervousness among the bank's clients about its association with the government's number one enemy, and also that the government had made "some calls" to big depositors. Given the sharp reduction in liquidity at Standard, the NBG had two options, he said, either to make loans to it or impose temporary administration. The former course of action was deemed too risky, he said. The NBG, and the NBG's designated administrator, Giorgi Kadagidze (head of the NBG's Financial Monitoring Service (FMS),the GOG's anti-money laundering watchdog),did not do a bad job, he said. He does suspect they may try to sell the bank, however. ¶5. (C) Christiansen said that the NBG is asking all bankers to report transactions in excess of 3000 lari (elsewhere reported as being 5000 lari). The normal reporting threshold for money laundering transactions is 30,000 lari. The reporting requirement is not a restriction on transactions, but it is aimed at bringing big transfers for campaign TBILISI 00003036 002 OF 002 finance to light. Christiansen said that Kadagidze, whose FMS would receive the reports from the banks, is trying to limit the reporting requirement to only certain types of transactions. COMMENT -------------- ¶6. (C) Comment: Christiansen expressed admiration for the skills, intelligence and common sense of PM Gurgenidze, NBG Acting President Amaglobeli and FMS head Kadagidze. All of them are up against the political turmoil of the current election period. If they ride the turmoil out and remain in office through 2008, they and other GOG economic officials will have their work cut out to reassure foreign investors, keep spending in line and fight inflation. TEFFT