Georgian inflation will reach the medium-term target of policy makers before the end of this year even as the economy faces an increased risk of external shocks, central bank Governor Giorgi Kadagidze said.
Price growth will accelerate to the monetary authority’s 5 percent goal “close to the end of the year,” Kadagidze, 34, said in an interview Thursday in the capital, Tbilisi. Consumer prices rose 1.3 percent in February from a year earlier.
The Georgian lari has declined along with other former Soviet currencies as the aftershocks of the Russian ruble’s collapse spread to their economies. As its northern neighbor careened toward recession and the government tightened visa regulations, Georgia’s tourism industry suffered and remittances from people working abroad dried up.
“All the major sources of foreign currency inflows of the country have decreased, which basically led to the depreciation of the local currency,” Kadagidze said.
The lari has declined 16.3 percent against the dollar this year, the fourth-worst performance among more than 170 currencies tracked by Bloomberg. Behind are three other ex-Soviet currencies: the Ukrainian hryvnia, the Belarusian ruble and the Azeri manat. The lari weakened 0.2 percent to 2.2530 per dollar as of 7 p.m. in Tbilisi.
Georgian monetary-policy makers have been criticized by the government, which said that they failed to defend the currency. In February, the central bank raised its benchmark interest rate to 4.5 percent from 4 percent. It left borrowing costs unchanged on March 25.
The tightening was a result of “risks affecting the forecast inflation rate having risen due to external shocks,” the central bank said at the time. The widespread use of dollars in the Georgian economy creates “additional inflation risks” because of the lari’s decline against the greenback, it said.
Former Prime Minister Bidzina Ivanishvili, whose allies remain in power, in February accused Kadagidze, appointed by ex-President Mikheil Saakashvili, of hurting the lari with “inaction and wrong actions.” Ivanishvili cited other countries in the region dipping into international reserves to shore up their currencies.
Georgia’s central bank opted to safeguard reserves, Kadagidze said.
“Many counterparts did not like that, but that is how it is,” he said. “Substituting the inflow problem with the reserves is not a solution at all and it’s been proven many times throughout economic history.”
While the lari depreciated against the dollar, Kadagidze pointed out that it has held up better against the currencies of Georgia’s biggest trading partners, including the euro area. It has declined 7.9 percent against Europe’s common currency this year, according to data compiled by Bloomberg.
“We are not importing inflation from our trading partners,” Kadagidze said. Also, the currency’s weakness has been counterbalanced by last year’s decline in the price of oil, he said.
The economy may grow 2 percent this year, Kadagidze said. That compares with the government’s estimate of 2 percent to 2.5 percent, which it cut from 5 percent in February. Gross domestic product rose 1.8 percent in the fourth quarter from a year earlier, the slowest pace since July-September 2013.
“One thing is for sure: calm times are gone and a very turbulent environment is ahead in this region, and in the world,” Kadagidze said. “Most EU countries are struggling, there is a big Russia-Ukraine conflict, which is 1,000 kilometers to the north, there’s the ISIS and Middle East crisis 1,000 kilometers to the south.”
This article was published yesterday on bloomberg.