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
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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
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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
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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
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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