Economy
Posted: 4 months ago

Coronavirus Effect on Economy

How the coronavirus is affecting the economy, and how the government’s economic stimulus plan can respond to the existing challenges – Irakli Kovzanadze, head of the Parliament’s finance and budget committee, analyzed these aspects of the crisis for the Business Partner TV Program. 

The government will introduce the second part of the economic stimulus plan in several days. The document has several components, and includes a social risk reinsurance component, Irakli Kovzanadze noted. 

“The government is working on this issue. I have some relevant information. This package will diversify several things. The Georgian Prime Minister has this prerogative, and the document will be introduced in several days. This is the second part. The first part aimed to assist the business sector, and the package was worth an estimated 1 billion GEL. The second part will place greater emphasis on social risks and reinsurance for both business and citizens who have lost or are expected to lose their jobs”, Irakli Kovzanadze said. 

The state budget will be completely fulfilled in the first quarter, however, problems are expected in the second quarter, precisely, starting in April, Irakli Kovzanadze pointed out. 

“As for the budget, I would like to say openly that the plan is being worked through, even now. When analyzing the 2019 preliminary report, we collected a 550 million GEL surplus in taxes to the consolidated budget. This is a very important factor. We have also mobilized income with certain reserves in January and February. Some problems came to the surface in March; however, I believe the first quarter will be close to being in compliance with the plan. Problems are expected to start in April. The next quarter is expected to see problems in terms of fulfilling the budget”, Irakli Kovzanadze noted. 

Instead of 4.5% growth in 2020, as planned by the state budget, the country will face an economic plunge. At the same time, the country is capable of valuably restoring the economy briefly after the post-crisis period, thanks to fundamental reforms such as the insurance of deposits, postponing the profit tax, and pension system reform. 

“We have an important formula: a working money and credit policy, strict supervision and the effective insurance of deposits. We lacked the insurance of deposits. The parliament has adopted a law regarding deposit insurance, and over the past 2 years we have insured deposits worth 2 billion GEL.  We have taken dramatic decisions. This means that Georgia’s monetary authorities such as the Central Bank and the Finance Ministry  are ready to respond to the challenge, and overcome the economic crisis. To this end, we have implemented very important institutional reforms. I believe that this crisis will pass, and I hope it is over soon. We will rapidly restore our economy. Nevertheless, there are a lot of problems ahead, too”, Irakli Kovzanadze said. 

As noted by the head of the parliament’s finance and budget committee, GEL volatility is preconditioned by two factors: the global economic turmoil generated by the coronavirus, and the collapse of global oil prices. However, the feverish demand for foreign currency and panic have also badly affected the GEL, Kovzanadze added. 

“I believe the developments over the past 10 days, prior to interventions in the currency, especially in the last phase, reflected only fevers and panics . I would like to stress that, in some cases there were domestic demands from some specific commercial banks regarding internal conversions. There were internal GEL-USD conversions at commercial banks. Therefore, a certain confidence was established, and factor resulted in, as well call it, the shock in demand. This caused the extreme depreciation of the GEL, and the exchange rate plunged to 3.5 GEL. Several factors worked in that period”, Kovzanadze said. 

Amid the current crisis, the NBG carried out currency interventions of about 100 million USD. This was a positive message, that the central bank participated, and this decision had a short-term effect, and the exchange rate strengthened to 3.27-3.28. However, as noted by Irakli Kovzanadze, the most important step taken by NBG was the revision of the strategy and the decision to carry out everyday monitoring of the market. 

“It should be stressed that, as noted by the Central Bank, it will carry out monitoring everyday, and this is the right decision. What does this mean? We saw that the last intervention was 40 million USD. I do not think we will need interventions of the same size. We may need smaller interventions; however, the Central Bank will participate in the market more frequently. This should be underlined, and the National Bank will take further steps in this direction”, Kovzanadze noted, and added that the NBG holds enough resources for currency interventions, and these resources will not be withheld in the current situation. 

“This is an important moment - the Central Bank holds enough reserves. We have accumulated these reserves, and the Parliament has provided overall support to the NBG in this regard. The NBG was frequently criticized because it collected reserves, but not by the Parliament. Today, the time has come to use these reserves,” Kovzanadze said, and added that today we have no grounds to tighten regulations in the banking sector.

“No way. Today, this is not our agenda. No regulations will be tightened by the National Bank in regards to commercial banks. I have  noted on purpose that the Georgian banking sector has capitalized very well. We protect every existing requirement. We’ve got recommendations by the Basel Committee, Basel 2 and Basel 3, and  the Georgian banking sector follows these recommendations. 

On the contrary, these regulations may even be weakened, if necessary. Similar recommendations were issued in 2008-2009. This practice may be applied this time, too. Similar recommendations were issued by the Parliament, many financial institutions, including the Monetary Fund. These regulations should be smoothed out,  if necessary. This does not mean that supervisory elements will weaken, but the situation requires everyday supervision”, Irakli Kovzanadze told Business Partner.