On January 25 the monetary policy committee of National Bank of Georgia (NBG) raised the refinancing rate by 25 base point.
In his interview with the BusinessContract Beso Namchavadze talks about tightened monetary policy and noncore assets.
-Mr. Beso, how would you appraise interpretations made by National Bank President over tightened monetary policy?
-In practice, it was inevitable to tighten monetary policy rate. Therefore, this is a justified decision. When the central bank expects the inflation to miss the target index (currently 4%), then it is obliged to tighten monetary policy rate. It is another issue what factors have led us to the existing situation. GEL exchange rate depreciation, on the one hand, and raising excise tax, on the other hand… In response, NBG had to raise refinancing rate, but this damages economic growth. This signifies the interest rate will rise and economic growth will decelerate . GEL-denominated loans will become more expensive, while commercial banks are obliged to issue loans in only GEL. This is a technical aspect. NBG had no other alternative. NBG had to take this decision, because it could not operate under high inflation rate. Experts note that if something good happens in economy, it may balance this factor, but if the current situation is maintained, GEL-denominated loans will become expensive by 0.25%.
-According to NBG President, refinancing rate will rise to 7% for the next 2 quarters. Could NBG tighten the policy more and was the mentioned 0.25% sufficient?
– NBG decision is based on certain calculations that include the so-called retarding period. Maybe, this was a justified decision in terms of technical aspects and it may bring certain results. However, they were saying that in the midst of 2016 the interest rate would be lowered to 65, but in reality the rate declined to 6.5% and now they started raising the rate again.
Their midterm forecasts did not justified, because certain situation worsened in economy and they had to tighten monetary policy rate again. In whole, 6.75% is a very high rate. Several years ago the rate was even 4% and lower.
-MP Ilia Tsulaia has put forward an initiative on noncore assets. Is it necessary today to regulate the mentioned issue at legislative level?
-This issue has been regulated to a certain degree. I do not back the idea of tightening the law further. This will be inefficient and uncontrollable. If commercial banks are banned to have noncore assets, then all other major business companies must be banned to do the same. And this policy may lead to the situation bank shareholders will be barred to hold noncore assets. This is impossible and we will ruin everything in this way.
NBG regulations remain restricted even today. M2 was stripped from Bank of Georgia, when the regulations were tightened. If we continue this policy, we will have to bar all other activities to company founders. I do not think this is a correct attitude.