Home / Banking / “NBG Discussions Represent Scapegoat Searching” — Eric Livny, Director of ISET

“NBG Discussions Represent Scapegoat Searching” — Eric Livny, Director of ISET

The International School of Economics in Tbilisi (ISET) recently presented its study on the Business Confidence Index in Georgia in the second quarter of 2015. The figures indicating the different sectors’ predisposition toward the business environment in Georgia have become dire since last year, having gone down from 24,5 to 3,6. Most pessimistic sectors in terms of the business outlook of the country are the financial sector and the retail industry.

In this regard, we had a chance to talk with Mr. Eric Livny who is the Director of ISET Policy Institute. As a foreign economist working closely with the Georgian data, Mr. Livny had some interesting points to raise about the current political discussions of the country. These include the policy of the National Bank and legislative regulations that limit Georgia’s development. Mr. Livny essentially believes that the on-going discussions on the NBG and Mr. Kadagidze are an example of blame putting and a “search for a scapegoat” in this turbulent economic environment. You can read the full interview below:

You mentioned that lack of discussion between the business sector and the government is hindering Georgian economy’s recovery process. What do you mean, specifically?

The main issue is the unpredictable policy environment; it’s not only the reshuffling of ministers, it’s also the laws and the regulations. For example, take the excise law. The government “had to,” supposedly, under the EU Association Agreement, to harmonize the excise taxes on alcohol and tobacco.

According to that same Association Agreement they could harmonize it within 3-5 years; sometimes even longer than that. Now if you do this harmonization within 5 years this, everybody can adjust – the consumers, as well as the producers. But the Georgian government imposed high excise taxes as of January 1, 2015; no discussion with the businessmen took place. No questions asked, no answers given.

Many experts also say there was no discussion regarding the new law on creating a new board that would oversee the NBG’s banking supervision process.

Well, that’s so new that there has been no chance to discuss it yet. I believe that this whole initiative is essentially a search for a scapegoat.

Do you think that implementation of this law would harm our banking sector?

The law itself is not a problem. You can take the whole department of the NBG that deals with banking supervision — which also incidentally employs many of my students — and rename it. By doing so, you just change the sign above the institution. It doesn’t matter that much. In different countries, they do it differently. In some countries, these institutions are under one sign, in other countries under three different signs. In the US, for instance, there are three different signs. In the UK there used to be two, now they united back to one. So you have all kinds of different examples; this doesn’t matter.

What matters is that people, for political reasons, are trying to destabilize the institutional environment of Georgia. This is bad because today they destabilize that aspect of the environment; tomorrow, they will destabilize some other aspect of the environment. And if the Parliament indeed will be calling shots in who is running the banking supervision – that will be terrible. Because the supervisor should not be the Parliament or any political party, it should be independent. That’s most important.

Some politicians in Georgia blame solely Mr. Kadagidze in the national currency’s current 32% depreciation.

Our currency is in excellent condition, first of all. Let’s imagine that our currency was still traded at 1,7 per dollar, as it was last year. We would have been terribly expensive with respect to the rest of the world. Nobody would want to buy Georgian products and imports would compete even more with our local production. So we would be losing our jobs. We would not be able to sell anything. We would not be able to compete with imports, so we would have been in a disastrous situation with lots and lots of unemployed people. We would have people protesting in the streets “We want jobs!”

Do you think that the policy of the NBG was correct?

Absolutely, yes. They did not burn reserves; they acted in a very professional manner and the results show. So the current situation of blame putting is really just politicking and trying to gain political capital and show that there are others who are the bad guys and we are the good guys.

How does the politicians’ discussion on NBG influence the potential investors? Can this be one of the causes in the decline of investments?

This is absolutely harmful. I don’t want to go so far as establish a causal link between these discussions and the decline in foreign investment. However, they are clearly not helping. When you have such discussions going on that the Parliament might start controlling the banking supervision or the National Bank – it’s not good.

You know, we have banks that are fully foreign-invested. All the large Georgian banks are foreign-invested. We don’t have a single large Georgia-owned bank. So, if the Banking Supervision Agency becomes less professional, more interventionist and politically-biased perhaps, this would lead to there being a “Bank of Friends” or a “Bank of Enemies.” This would be a major disaster for Georgia. In fact, Georgia had a recent history when Bidzina’s own bank was raided by the Saakashvili administration in 2012.  So, we don’t want the history to repeat itself in that way.

By Nino Gojiashvili & Nino Kvintradze