07TBILISI2401, IMF REPRESENTATIVE WARNS OF INFLATION, GOVERNMENT

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Reference ID Created Released Classification Origin
07TBILISI2401 2007-09-24 12:20 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO2427
RR RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSI #2401/01 2671220
ZNY CCCCC ZZH
R 241220Z SEP 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 7717
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 002401 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EB/IFD/OMA 
COMMERCE FOR ITA/MAC DANICA STARKS 
TREASURY FOR OIA:WLINDQUIST 
 
E.O. 12958: DECL: 09/25/2017 
TAGS: EFIN ECON PGOV GG
SUBJECT: IMF REPRESENTATIVE WARNS OF INFLATION, GOVERNMENT 
INFIGHTING OVER CONTROL OF ECONOMIC POLICY 
 
 
TBILISI 00002401  001.2 OF 002 
 
 
Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d). 
 
1.  (C) Summary: In a September 19 meeting with the 
Ambassador, the IMF's resident representative in Georgia, 
Robert Christiansen, told the Ambassador that he is concerned 
about a possible resurgence of inflation, which hit more than 
14 percent in mid-2006 but has subsided to around 7-8 percent 
since then.  Discipline in government spending is the only 
way to control inflation, in his opinion.  He sees an ongoing 
competition for control of economic policy within the 
government.  The future of the central bank, the National 
Bank of Georgia (NBG), needs to be decided, specifically 
whether it will retain its bank supervision role and even its 
monetary policy role.  His conversations with commercial 
bankers do not reveal concern about the recently experienced 
global contraction of credit.  End Summary. 
 
2.  (C) Christiansen told the Ambassador that the economy is 
heating up, with real GDP growth of 12 percent year on year 
in the first half of 2007.  He worries that the threat of 
inflation is increasing.  The cause, he said, is not foreign 
investment, which is surging, but the government's "fiscal 
mismanagement."  Although inflation is now running at 7.7 
percent, Christiansen said, all indicators including the 
producer price index and the growth of broad money (currently 
about 50% for the year) predict an upward spike in inflation 
in the near future.  He thinks the rate will be about 10 
percent by the end of the year.  He says the consensus among 
government officials is that so long as inflation is less 
than 10 percent, they will have no political problems as a 
result.  (Inflation is especially painful for the poor in 
Georgia.  While overall inflation has been relatively 
moderate, as Christiansen notes, there have been significant 
increases in the costs of foodstuffs such as potato (79 
percent), corn flour, chicken meat and eggs, according to the 
Department of Statistics.) 
 
3.  (C) The threat Christiansen perceives is manageable if 
the government takes the necessary steps, he said.  This 
mainly means reining in government spending and increasing 
interest rates to slow down growth.  But Christiansen is not 
optimistic that spending will easily be contained as Georgia 
moves into an election year.  The best that could be done, he 
said somewhat ironically, is to give the government a budget 
for election-related spending and hope they stick to it.  He 
believes there is competition going on for management of the 
economy between Presidential insiders led by Prosecutor 
General Zurab Adeishvili and Internal Affairs Minister 
Merabishvili on the one hand and Prime Minister (and former 
Finance Minister) Zurab Noghaideli on the other.  He sees 
Adeishvili gaining more control over the Ministry of Finance 
with the appointment of Nika Gilauri and the forced 
resignation of the Director of Taxation, Mindia Gadaevi. 
(Note: we have been impressed with Gadaevi's energy and 
sincere devotion to improving the revenue service. 
Christiansen brought the first news of his resignation to us. 
 We have heard separately that Gadaevi will soon be appointed 
the new head of Millennium Challenge Georgia.)  He thinks 
Noghaideli ally Aleksi Aleksishvili will not become president 
of the NBG even though he has been nominated to the post. 
 
4.  (C) In the meantime, Christiansen said, decisions must be 
made about the direction of the central bank, now that its 
poorly regarded former head, Roman Gotsiridze, is out. 
Adeishvili is concerned about corruption in the supervision 
of banks and apparently wants to strengthen it, possibly by 
establishing a entirely separate agency to handle the task. 
The NBG can then either retain an active role in monetary 
policy, or a currency board could be initiated, leaving the 
NBG with a very small role to play in the economy. 
 
5.  (C) Establishing a currency board, where money emission 
is strictly limited by the foreign currency reserves on hand 
at the central bank, is a pet project of the State Minister 
for Economic Reforms, Kakha Bendukidze.  Christiansen says 
that the banking sector must be "exceedingly strong" and it 
must have good supervision if a currency board is to work. 
The latter is now lacking, in his view.  Under a currency 
board, he adds, all shocks to the economy will have to be 
absorbed by impacts on the gross domestic product.  The 
government will have to be careful and disciplined in its 
spending.  He is not sure the government fully understands 
the implications and is really ready to take responsibility 
for the possible impact of a currency board on growth.  That 
said, Christiansen admits a currency board has worked well 
for Estonia, which is in many ways a model and mentor for 
 
TBILISI 00002401  002.2 OF 002 
 
 
Georgian o
fficials.  Bendukidze would like to see Georgia 
become an international financial center.  His advisors have 
told him that Georgia can only succeed in competing with 
other tax havens and offshore banking centers if it has a 
good and compliant money laundering law, and Bendukidze seems 
to be giving up his hitherto unsuccessful efforts to weaken 
the money laundering regime.  The Financial Monitoring 
Service has drafted stronger anti-money laundering laws based 
on recent MONEYVAL recommendations and is about to present 
them to the government. 
 
6.  (C) Christiansen told us that he has discussed the recent 
tightening of credit conditions in the global economy with 
local commercial bankers.  He said the bankers have told him 
there has so far been no noticeable adverse effects on their 
ability to raise capital. 
 
TEFFT

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