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Giorgi Kadagidze Sketch
Sketch by Ilia Chrelashvili, Caucasus Business Week©

Kadagidze’s Presidency Ends: Pros and Cons of his 7 Years of Governance

Giorgi Kadagidze, the President of the National Bank of Georgia (NBG), will finish his duty term on February 25.

For seven years (2009-2016) he has chaired the central bank of Georgia. This period has recorded both progressive and regressive tendencies and we will expose several ones in this article. Naturally, it is difficult to valuably and perfectly highlight Giorgi Kadagidze’s performance in the NBG in one newspaper article.

Even the whole newspaper issue would not suffice to this end. Seven years cover a long period and even research works can be conducted to valuably explore this period. Therefore, we will make focus on famous and more or less publicized facts from this period.

Giorgi Kadagidze occupied the NBG President’s position in February 2009, amid deep financial crisis in Georgia and worldwide. Two years before he chaired the financial supervision agency that had been breached from the NBG six years before.

Before Kadagidze’s appointment, for two years the NBG was functioning without a president, in practice. The vice president David Amaghlobeli was managing the NBG. At the beginning of 2009 the then Authorities was actively discussing probability of abolishing the NBG entirely, as well as of replacing GEL, as an only payment currency, and moving to the multicurrency regime.

However, after the appointment, Kadagidze persuaded everybody that he objected to abolishing the central bank and the national currency. Shortly, the interbank currency exchange was cancelled and it was replaced by the currency auction system. This signifies the GEL exchange rate determination started due to modern practice.

However, Kadagidze closed the information on currency auction demands under the absurd pretexts as if this information could be misinterpreted in various directions. Consequently, the Georgian society lost access to the information on the volume of demand for this or that currency. The GEL exchange rate formation issues were classified, in practice.

Thus, Kadagidze took the first decision after his appointment as the NBG President. As noted above, it is impossible to cover all positive and negative aspects of Kadagidze’s performance in the same article. Therefore, we have selected 4-4 samples in each direction that are easily perceptible and understandable for the society. Thus, we refrain from making deep economic assessments.

Positive

Commercial Banks Were Stripped of Noncore Businesses

In October 2014, according to the NBG decision, Georgia-based commercial banks were stripped of the rights for doing noncore businesses.  As a result, the bank sector is entitled to carry out only traditional finance services. Moreover, the regulations for issuing licenses for undertaking noncore business were also tightened and the pre-2008 practice was restored. The commercial banks that had noncore assets were given a reasonable time until December 31, 2015 for gradual withdrawal from their noncore businesses.

The business sector and economic experts had long suggested the NBG to take this decision and the national bank finally satisfied this request.

It should be also noted the NBG smoothed noncore business regulations in 2008 with the aim to alleviate the global economic crisis effect on Georgia. The NBG substantiated the decision by the intention to avoid negative affect on competition in the real economic sector. The existing practice generated risks for clash of interests, the NBG noted then.

It is interesting that there is various practices in various countries. In 49 countries commercial banks are banned to keep noncore assets, while 48 countries have set strict regulations on noncore business activities.

Protection of Consumer Rights

Protecting the rights of users of financial services is one of the priorities of the NBG. For many years Georgian consumers stress that commercial banks violate the consumer rights and request from the government and the NBG to take efficient steps.

The national bank has carried out several important initiatives under the ruling of Giorgi Kadagidze. The fact is our society keeps criticizing commercial banks even today and it is difficult to assert the consumer rights are protected by credit institutions, but Giorgi Kadagidze has genuinely carried out certain steps to improve the situation.

In May 2011 the consumer rights protection department launched operation at the NBG. The department is to carry out continuous monitoring over the finance sector’s consumer market. Moreover, this department administers the fulfillment of “regulations for supply of required information to consumers by commercial banks when providing banking services”.

Under these regulations, that were enacted on June 1, 2011, commercial banks must supply all required information to the clients that are related to taking loans and explain the risks from unpaid loans. At the same time, commercial banks are obliged to inform clients about the efficient annual interest rate on loans that include all expenditures required for the credit service.

At the same time, commercial banks are banned to impose more than 2% of the principal sum on early repaid loans. As a result, loans porting practice was expanded.

Currency Reserves Hit Record High

Geogia’s currency reserives have reached the record high under the ruling of Giorgi Kadagidze. In 2012 Georgia’s international currency reserves marked 2.65 billion USD, while this amount slightly declined in the next years.

The NBG international currency reserves due to years (USD):

2010  – $2 billion;

2011  – $2.5 billion;

2012  – $2.65 billion;

2013  – $2.6 billion;

2014 – $2.43 billion;

2015 – $2.32 billion;

The Banker Named Giorgi Kadagidze the Best Manager of Central Bank in Europe in 2014

The Banker, the British financial magazine owned by the Financial Times Group, has named Giorgi Kadagidze as the best manager of a central bank in Europe for 2014.

The world’s one of the influential editions carries out annual research to name leading financial institutions and the best bankers in 149 countries. The winners were named based on the report of the previous year.

The Banker: – “The well-capitalized and stable bank sector that has shown sustainability to main shocks, as the main characteristics for the past years in Georgia. As a result, the Georgian National Bank President Giorgi Kadagidze shared the Georgian experience in the bank sector supervision to the central banks of Kazakhstan, Tajikistan and other countries as part of the WB-financed program in 2014”.

Negative

Record Low and High Inflation Rates

The NBG’s key assignment is to ensure stability of prices, id est, regulation of inflation processes. Inflation turned out an inordinate problem for Kadagidze and the central bank. Inflation tendencies were permanently chasing the Georgian economy and the Kadagidze’s performance period could not be exception.

The highest inflation rate in the 2009-2016 period was registered in May 2011, when the annual inflation rate marked 14.3%. This figure was by only 0.2% higher than Georgia’s lowest ever inflation rate of 14.5% that was recorded in July 2006, under the management of Roman Gotsiridze.

Moreover, the record deflation of – 3.3% was recorded under the ruling of Giorgi Kadagidze. The fact was registered in May 2012. All economic experts know that deflation is worse than inflation.

It should be also noted, starting 2009 the central bank follows the target inflation rate monetary policy. In this regime, the NBG preliminarily determines the target inflation rate, id est, the figure that should not be over the predetermined annual inflation rate. Regretfully, the NBG’s all target inflation rates turned out unrealistic and erroneous. Therefore, the country had to respond to either deflation or inflation tendencies for many years.

For the past 7 years, the inflation tendencies have not grown into dramatic developments (excluding the year of 2011, the annual inflation recorded two-digit figures), but the inflation rate was not curbed within the target benchmarks.

Failure of Larization

The public trust to the Georgian national currency is low and the high dollarization coefficient in the bank sector proves this consideration. According to the last reports, the dollarization coefficient is 69% in the bank sector. This signifies the ratio of foreign currency denominated deposits in the bank sector accounts for ¾.

In 2010 the new NBG President Giorgi Kadagidze announced the dollarization coefficient reduction to be one of the priorities of the central bank. He also introduced a new term to call the new campaign – Larization.

The Larization project aimed at developing the national currency money market and reducing the Dollarization volume. Six years ago Kadagidze asserted that the Larization would protect Georgian citizens and the business sector from currency risks.

In spring 2010 the NBG President announced the commencement of the Larization campaign, the dollarization coefficient in the bank sector constituted 68%-69%. By the end of 2010 the dollarization coefficient slightly increased to 70% and after periodic volatilities the coefficient decreased to 60% by autumn 2014. However, the GEL exchange rate depreciation inspired an upturn in the dollarization rate again and the deposits dollarization ratio marked 69% by the end of 2015.

The international experience suggests that several countries have  overcome this problem in 10 years. Thus, the Larization campaign announced by Giorgi Kadagidze as one of the main priorities thoroughly failed.

GEL’s Historical Bottom

Giorgi Kadagidze and his supporters were permanently asserting that the GEL exchange rate stabilization issue was beyond the NBG responsibilities. This is rather an ordinary lie to escape the responsibility, because the NBG is an only instance that holds a direct leverage to affect the GEL exchange rate. At the same time, the GEL exchange rate directly affects the price growth tendencies and it is the direct obligation of the national bank to stabilize the general level of prices.

In 2009-2016 the Georgian national currency was less stable, but two periods should be paid highlighted. In 2010 the GEL exchange rate fell to 1.88 point from 1.69 point and then strengthened again to 1.63 point. In 2014-2016 the GEL exchange rate against USD depreciated by about 40% to 2.49 point from 1.75 point and the Georgian national currency saw its historical bottom.

Cartu Bank Case

Among the mistakes Giorgi Kadagidze has made, the case with Cartu Bank is one of the most important and politically motivated issues. The NBG president failed to remain unbiased, he did not protect the commercial bank and acted as an ordinary member of the then ruling United National Movement party.

Everything started when law enforcers seized Cartu Bank’s cash of several millions of GEL under the pretext  of money laundering. Then the parliament of Georgia amended the law on enforcement proceedings and the tax code and stripped commercial banks of the primary mortgager rights. Commercial banks regained the primary mortgaging rights in April 2012.

In reality these amendments were enacted against Cartu Bank, while these changes threatened the whole bank system and all international organizations and commercial banks were talking about this. Kadagidze preferred to keep silent and did not protect Cartu Bank and the whole bank system of Georgia.

Additional legislative amendment was made on April 30, 2012 to the law on national bank and the parliament removed the entry, under which the NBG board member could be only financier or/and economist, but no more than 2 members.

In two weeks after the enactment of the changes, on May 15, 2012 the parliament approved two new members of the NBG board, including the former assistant of Giorgi Kadagidze, with the profession of an engineer-chemist, and another member was a lawyer. After these steps the NBG board practically lost its function as the supreme managing board of the NBG and Giorgi Kadagidze set full control on the Georgian central bank.

By Merab Janiashvili
Economic Analyst
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