Since the most recent global financial crisis, interest rates in developed countries have been unprecedentedly low. The real interest rates are close to zero and in a number of cases, are even negative.
The European Central Bank was the initiator for establishing the negative interest rates when it began using monetary policy instruments previously unheard of.
The interest rates of the Central Banks of Europe, Japan, Denmark, Sweden and Switzerland were set at0.4% in March 2017. As for the real interest rates of the United States, UK, Germany and Japan, they have been moving from positive to negative for the past 15 years (see the above diagram).
Economists have yet to come up with a unified view about whether or not this new and paradoxical practice tailored for long-term economic growth according to its authors, will be successful.
It must be pointed out that the trend towards negative interest rates has been around for the past seven years, aiming to avoid deflation and stimulate economic growth. The Head of the International Monetary Fund, Christine Lagarde, states: “If we had not had those negative rates, we would be in a much worse place today, with inflation probably lower than where it is, with growth probably lower than where we have it.It was a good thing to actually implement those negative rates under the current circumstances.”
The Georgian Example
Unlike the national and commercial banks of developed countries, Georgia’s banking system has not yet reached close to zero or negative interest rates. Taking a loan in foreign currency costs an average of 10% while it is more than 20% in the national currency.
It is interesting to know how prudent it would be for Georgia to share this world experience and what kind of positive results or drawbacks could expected from establishing negative interest rates.
Firstly, it should be noted that the positive result of negative interest rates could be in the form of achieving a long-term goal; that is, economic growth. Making the refinancing rate policy less strict would make the national currency resources cheaper for Georgian commercial banks. If we take into account that loans up to GEL 100,000 can only be given in the national currency, this will push commercial banks to take more loans (in order to get lower interest rates).
As for depositaries, the possibility for them to receive profit in terms of the negative interest rate is disregarded. Furthermore, this individual or legal entity will have to think about inflation as well. Hence, depositors have no stimuli to place their savings in commercial banks and are faced with a choice: freeze their financial resources by turning them into non-financial assets, which is a rather risky measure taking into account the crime factor (robbery, for example), or spend money and facilitate economic activity.
It is no less important that the negative interest rate will influence the interest rates of commercial banks, thereby bringing them down. This, in itself, is a stimulus for local investments. A chain will be created where investment will increase production while the production will make the economy stronger.
According to the examples presented above, we can argue that a negative interest rate positively influences the economy of the country.
On the other hand, however, it is still debatable whether or not the aforementioned monetary instrument is the right way for Georgia to help increase its economy.
First of all, we need to take a look at the structure of bank deposits and loans. The 2017 data of the National Bank of Georgia indicate that deposits attracted by commercial banks amount to GEL 17.6 billion while the amount of distributed loans is GEL 17.9 billion (overall in both national and foreign currencies). From this, we can infer that the amount of attracted deposits is vital for the functioning of commercial banks and decreasing them could, in its turn, decrease the number of loans given as well.
According to the assessment of experts, about 80% of the Georgian consumer basket consists of imported products and the import itself is four times larger than export. Except for the small quantities of groceries produced locally, everything is imported: electrical appliances and computers, the majority of foodstuffs, petroleum products, medications, production equipment and machinery, cars and so on. Hence, in the case of a negative interest rate, the stimulation among the population to spend will increase the demand on imported products, rather than the local ones which, in reality, does not add much to the Georgian economy.
The issue of the stability of the national currency must also be underlined. Specifically, low interest rates on refinancing will increase the demand on GEL and consequently increase its supply as well. This, without adequate economic development (including the development of industry) could be counterproductive. Taking all of these factors into account, the depreciation of GEL would be the most likely outcome which will make imports and servicing foreign obligations more expensive.
The banking sector is one of the most powerful and stable sectors in the Georgian economy. However, given the current Georgian reality, it is no secret that despite the regulations on the banking sector, banks still manage to support non-profile assets. Hence, there is a significant risk that the competition in this sector will become even smaller. Banks are likely to invest more in non-profile assets.
In conclusion, we can say that despite the positive international experience, implementing negative interest rates in Georgia could prove to be risky.
Mariam Lashkhi, TSU Center for Analysis and Forecasting