07TBILISI3036, IMF SEES SLOWER GROWTH, HIGHER INFLATION AND

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Reference ID Created Released Classification Origin
07TBILISI3036 2007-12-06 13:50 2011-08-30 01:44 CONFIDENTIAL Embassy Tbilisi

VZCZCXRO5382
RR RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHSI #3036/01 3401350
ZNY CCCCC ZZH
R 061350Z DEC 07
FM AMEMBASSY TBILISI
TO RUEHC/SECSTATE WASHDC 8378
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 TBILISI 003036 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR EUR/CARC AND EEB/IFD/OMA 
 
E.O. 12958: DECL: 12/06/2017 
TAGS: ECON EFIN PGOV GG
SUBJECT: IMF SEES SLOWER GROWTH, HIGHER INFLATION AND 
GOVERNMENT DEFICIT FOLLOWING GEORGIA POLITICAL CRISIS 
 
REF: TBILISI 2978 
 
Classified By: Ambassador John F. Tefft, reason 1.4(b) and (d). 
 
INFLATION UP, GROWTH DOWN SOME 
------------------------------ 
 
1. (C) Robert Christiansen, the IMF's resident representative 
in Georgia, told the Ambassador on December 5 that the 
uncertainty arising from the current government crisis has 
caused foreign investors to put their plans for investing in 
Georgia on hold, but not necessarily to cancel them entirely. 
 As a result, growth in 2007 will likely be one to two 
percent less than the 12.5 percent the IMF had been 
forecasting.  He said that the government's budget for 2008 
is conservative and forecasts only 5.5% growth in GDP in 
2008.  Christiansen said that the government is spending 
money at a greatly accellerated rate ("like a drunken 
sailor") and as a result the 2007 overall budget deficit is 
expected to be five percent of GDP and inflation, running at 
11.7 percent year on year in November, will finish at 12 
percent for 2007.  He expects inflation will be even higher 
next year. 
 
2. (C) With a presidential election planned for January 2008, 
new Prime Minister Lado Gurgenidze can do little about 
spending in 2007.  However, Christiansen said that Gurgenidze 
wants to cut the government's spending in 2008 as much as 
possible.  The PM's chances of success in that effort depend 
on when the parliamentary elections will be held in 2008.  If 
the campaign period extends nine months, until Fall 2008, it 
will be difficult to contain spending, he said.  Christiansen 
said that Gurgenidze has told him he will encourage the 
National Bank of Georgia to raise interest rates and allow 
the lari to appreciate further.  Christiansen deems both 
measures appropriate to fight inflation.  He observed that 
the government must be careful not to raise interest rates 
too much, because this will attract foreign deposits that 
will exacerbate inflationary tendencies. 
 
PLANS FOR CONTINUED REFORM 
-------------------------- 
 
3. (C) Christiansen said that Prime Minister Lado 
Gurgenidze's background in banking gives him an excellent 
grasp of economic issues.  The Prime Minister has formed a 
working group within the cabinet, including State Minister 
for Reforms Kakha Bendukidze and Minister of Finance Nika 
Gilauri in order to generate a nucleus of consensus on 
economic topics.  If he remains as Prime Minister after a 
Saakashvili win, Gurgenidze has told Christiansen, he will 
have the government take a number of important, positive 
steps early in the year.  These include strengthening the 
banking system, the judiciary and the tax system.  All will 
be important to reassure and re-attract investors. 
Christiansen said that although the government has made 
significant reforms on paper, there is still a great need to 
make it easier in reality to do business in Georgia.  Another 
task for early 2008 is finding a new president for the NBG. 
Christiansen thinks the current acting president, David 
Amaglobeli, is the best choice for the job. 
 
STANDARD BANK TAKEOVER 
---------------------- 
 
4. (C) Christiansen said that the NBG's imposition of 
temporary administration on Standard Bank, controlled by 
Badri Patarkatsishvili (reftel), was justified by significant 
withdrawals after the November 7 events.  The bank's 
management was "burning through cash at a rapid rate", he 
said.  But Christiansen also saw some truth in the claims 
that withdrawals were attributable to nervousness among the 
bank's clients about its association with the government's 
number one enemy, and also that the government had made "some 
calls" to big depositors.  Given the sharp reduction in 
liquidity at Standard, the NBG had two options, he said, 
either to make loans to it or impose temporary 
administration.  The former course of action was deemed too 
risky, he said.  The NBG, and the NBG's designated 
administrator, Giorgi Kadagidze (head of the NBG's Financial 
Monitoring Service (FMS), the GOG's anti-money laundering 
watchdog), did not do a bad job, he said.  He does suspect 
they may try to sell the bank, however. 
 
5. (C) Christiansen said that the NBG is asking all bankers 
to report transactions in excess of 3000 lari (elsewhere 
reported as being 5000 lari).  The normal reporting threshold 
for money laundering transactions is 30,000 lari.  The 
reporting requirement is not a restriction on transactions, 
but it is aimed at bringing big transfers for campaign 
 
TBILISI 00003036  002 OF 002 
 
 
finance to light.  Christiansen said that Kadagidze, whose 
FMS would receive the reports from the banks, is trying to 
limit the reporting requirement to only certain types of 
transactions. 
 
COMMENT 
------- 
 
6. (C) Comment: Christiansen expressed admiration for the 
skills, intelligence and common sense of PM Gurgenidze, NBG 
Acting President Amaglobeli and FMS head Kadagidze.  All of &
#x000A;them are up against the political turmoil of the current 
election period.  If they ride the turmoil out and remain in 
office through 2008, they and other GOG economic officials 
will have their work cut out to reassure foreign investors, 
keep spending in line and fight inflation. 
TEFFT

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