Economy
Posted: 4 years ago

Growing Prices and Government’s Macroeconomic Policy

GEL depreciation has provoked a growth in prices. The inflation has hit its maximum rate since June 2017.

How does the National Bank plan to lower inflation and how should we appraise the government’s macroeconomic policy? Analyst Andria Gvidiani has discussed the mentioned issues for the BusinessPartner TV program.

The NBG has made a mistake, it tightened the monetary policy in September, not in June, and delayed taking  preventive measures for efficient management of inflation. Monetary policy tightened in September or October will bring real effects at the end of 2019 or at the beginning of 2020, he said.

Today, the official inflation rate is 6.9%, twice higher than the target rate and this is the result of the NBG’s inefficient monetary policy. Consequently, there are risks that high inflation thwart economic growth, Gvidiani said.

The NBG was to raise the monetary policy rate in May, when the GEL devaluation signs emerged, Gvidiani noted

When talking about correlation between inflation and the currency exchange rates, first we should make focus on effective exchange rate, not the nominal exchange rate. The effective exchange rate includes:  the nominal exchange rate in our country, the nominal exchange rates in those importer countries, from where our country carries out imports and general level of prices in importer countries, that is, inflation rates.

“The effective exchange rate started deterioration in relation to Russian and Turkish economies in May. This signifies that economic recovery in two major trade partners and positive economic tendencies there brought negative effect onto our exchange rate and consequently, the effective exchange rate started devaluation stage by stage. This signified  that the mentioned factor would hit our economy automatically. I think the NBG has made mistake, when it did not raise the monetary policy rate and did not took preventive measures for efficient management of inflation near the target rate. Consequently, this process has become of irreversible character. The June 20-21 developments have also aggravated the situation, as well as a slowdown in incomes from tourism in July and August 14 times, initially, and then by 11% later. These factors have aggravated pressure on inflation several times. Therefore, 0.5% growth in monetary policy rate in September and then a 1% raising of the rate at the ahead of schedule meeting of the monetary policy committee was an essential shock. This approach has already brought problems and will bring much more problems to both economic and macroeconomic directions”, Andria Gvidiani said.

Protracted decision for raising of monetary policy rate will bring effect much later, he explained.

‘When the monetary policy is tightened, effects appear in mid-term period. I mean that we were to tighten the policy and take respective decision for efficient management of inflation in June and today we would have real results, while the September and October decisions will bring effect at the end of 2019 or at the beginning of 2020”, Andria Gvidiani said.

The Authorities should show uncompromising and bold position for building new electricity stations, because energy independence is one of the key factors for political stability of the country, Gvidiani said.

Growing electricity imports is another fundamental factor that provokes GEL devaluation and strengthens inflation risks. It should be noted that 99% of imported electricity was received from Russia in October and besides inflation aspects, this factor threatens Georgia’s security too, he said.

Georgia’s energy dependence is related to indifferent position to construction of new hydro power stations and government’s excessively concessive position to this issue, Gvidiani said.

“Energy security and energy independence is one of the key aspects of Georgia’s political stability. Consequently, today’s policy, indifferent position to construction of new hydro power plants and absence of uncompromising attitude create certain problems. This happens when Georgia possesses huge resources in terms of hydropower development. We are capable for developing about 15 500 megawatt installed generation power, but we have employed only 3000 megawatts. In kw/hours, this means that Georgia has not employed about 40 billion kw/h resources. Common sense is required to make due analysis in this respect. Therefore, we believe that the Authorities should show uncompromising position and build new power stations. We must employ all resources, including in terms of construction of major HPPs”, Andria Gvidiani said.

At the same time, people criticizing Russian natural gas imports do not protest against growing dependence on Russian electricity imports and this is a controversial fact, Andria Gvidiani noted.

‘We remember that opposition parties and civil sector representatives showed negative position to the agreement with Gazprom, referring to growing dependence on Russian natural gas. Today Georgia has the lowest ever gas supply dependence on Russia – only 3%. However, the same category does not talk about growing dependence on Russian electricity. When talking about energy independence, both directions – electricity and gas supply directions are very important  and the Authorities should take bold and uncompromising decisions in this respect”, Andria Gvidiani said.

The key problem is that the Authorities and local population lack for valuable communication, he explained.

“A lack of communication is a key challenge. Certain nongovernmental organizations, the so-called green NGOs frequently spread misinformation and hamper the process of building new HPPs. Moreover, no countermeasures are taken by the Authorities. There is not aggressive and constructive campaign with our population to explain benefits from hydro power plants. The majority of local population does not realize these benefits and they receive information from only NGOs, which in most cases try to hinder the construction of HPPs”, Gvidiani said.