07TBILISI1140, GEORGIA’S CENTRAL BANK GOVERNOR UNDER FIRE

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Reference ID Created Released Classification Origin
07TBILISI1140 2007-05-15 14:11 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO5745
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSI #1140/01 1351411
ZNY CCCCC ZZH
R 151411Z MAY 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 6355
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 001140 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EB/IFD/OMA 
COMMERCE FOR 4231 DANICA STARKS 
TREASURY FOR OIA 
 
E.O. 12958: DECL: 05/16/2017 
TAGS: PGOV EFIN GG
SUBJECT: GEORGIA'S CENTRAL BANK GOVERNOR UNDER FIRE 
 
REF: TBILISI 1065 
 
Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d). 
 
1.  (C) Summary: Roman Gotsiridze, the president of the 
National Bank of Georgia (NBG), Georgia's central bank, came 
under withering criticism in Parliament after he presented 
the Bank's annual report on May 10.  Parliamentary criticism 
reflected a less than exact understanding of the interplay 
between the causes of inflation and the reasons for the 
continuing pressure for appreciation of the lari.  However, 
it did indicate a weakening of Gotsiridze's heretofore 
relatively secure position at the head of the central bank, 
which he has maintained despite some real questions, by real 
experts, as to his ability to manage the country's monetary 
policy.  The NBG's report must be approved by Parliament.  If 
Parliament fails to do so, it may trigger Gotsiridze's 
resignation or removal.  End Summary. 
 
2.  (SBU) The Chairman of the Parliamentary budget committee, 
Irakli Kovzanadze, took issue with the NBG annual report's 
conclusion that inflation (8.8 percent in 2006) is mainly due 
to "external factors" including the Russian embargo and 
rising prices for energy.  The influential Speaker of the 
Parliament, Nino Burjanadze, expressed her disapproval of his 
performance as well.  Gotsiridze defended himself, saying 
that "no one could prevent inflation when there has been a 
fourfold increase in gas prices since 2005." 
 
3.  (SBU) Besides inflation, Kovzanadze also questioned the 
NBG's recent more relaxed attitude toward appreciation of the 
lari, which is to a large extent driven by inflows of foreign 
investment, such as last year's successful USD 150 million 
stock offering on the London Stock Exchange by the Bank of 
Georgia (a commercial bank, not to be confused with the NBG). 
 However, fighting both inflation and currency appreciation 
at the same time is a difficult trick for any central bank. 
A tighter money policy, designed to attack inflation, tends 
to put upward pressure on the currency as the supply of 
domestic exchange is reduced.  Thus, the IMF has counseled 
the NBG to be more flexible regarding the lari.  The IMF has 
also pointed out to the GOG more than once that increases in 
government spending also tend to push up inflation, and 
suggested that excess revenues go to reduce indebtedness.  It 
is Kovzanadze's Parliament that approved two supplemental 
budgets in 2006 and is looking at another one now that will 
increase overall spending by 20 percent over 2006 in 2007 
(reftel). 
 
4.  (C) What experts have found wrong with Gotsiridze's 
leadership is his failure to support creation of effective 
tools for managing Georgia's money supply.  The NBG has begun 
packaging government securities into marketable bonds, but 
has been reluctant to offer interest rates high enough on 
them to attract the interest of commercial banks without 
sweeteners -- such as the exchange of the Bank of Georgia's 
entire proceeds from its IPO in London in return for its 
purchase of bonds at lower rates than it would otherwise 
accept.  The amount of such securities that the bank has been 
offering is rather small to affect the money supply in a 
meaningful way.  Besides bonds, the bank is also marketing 
its own certificates of deposit (CD's).  It has begun to 
offer rates that are making the CD program more effective. 
The NBG needs to take a more pragmatic approach to pricing 
its securities and CD's in order to manage the currency 
inflows the government is expecting, including the likely 
prospect of USD 132 million from the sale of UEDC to the 
Czech company Energo Pro.  Gotsiridze has been slow to 
recognize that the real purpose of open market operations is 
promoting price stability and fighting inflation, not making 
a profit on his portfolio. 
 
5.  (SBU) On a more optimistic note, after a visit to the New 
York Federal Reserve Bank in April by many of its members, 
the NBG board took the New York Fed's recommendation and is 
introducing a new reserve requirement policy.  The NBG's 
policy is aimed at encouraging a more proactive approach from 
commercial banks in their reserve management operations.  It 
is the first step towards creating a fully functioning 
inter-bank market in Georgia and will make the development of 
a fully functional open market desk at the NBG much easier. 
The new policy will begin to be implemented in May and all 
new requirements will be mandatory on January 1, 2008.  The 
NBG is working now to familiarize the banks with its new 
policy. 
 
6.  (C) April 2007 monthly inflation was 0.3 percent, which 
 
TBILISI 00001140  002 OF 002 
 
 
brought twelve-month inflation ending April 2007 to 8.11 
percent, compared to 9.72 percent for the twelve months 
ending in March.  Even though reported inflation has now 
dropped to a less troublesome level, it continues to be at a 
level requiring more effective tools in the hands of the NBG, 
and more responsibility for in
flation must be accepted at the 
Ministry of Finance for the Government's relatively loose 
fiscal policies.  There is enough blame to go around.  The 
public and parliamentary focus now seems to be on Gotsiridze, 
although perhaps not for the right reasons. 
TEFFT

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