Decline in Georgian economy in third quarter - 3.8%
By Natalia Kochiashvili
Thursday, November 5
The President of the National Bank (NBG), Koba Gvenetadze presented another report on monetary policy, saying that the main task of the NBG is to maintain low inflation in the country.
According to the NBG, low inflation is necessary to ensure long-term economic growth and a natural level of employment. Given the unprecedentedly strong recessions as a result of the lockdown, the world economy, including that of Georgia, received a severe hit this year.
“After a 12.3 % annual decline in the Georgian economy in the second quarter, according to preliminary data, the decline in the third quarter was relatively small - about 3.8%. However, it is still difficult to talk about overcoming the shock.” Gvenetadze explained.
According to the current forecast of the National Bank, in 2020 the real GDP will decrease by 5%, and in 2021 it will start to recover and will increase by about 5%.
The NBG head noted that there is also uncertainty on a global scale, stemming primarily from the pandemic. Georgia, as well as the world, has suffered most in the tourism industry. Since March, after the declaration of the state of emergency and the closure of the borders, the entry of foreign visitors to the country has almost ceased, which has had a sharp negative impact on the trade balance.
As a result, the dynamics of reducing the current account deficit in recent years have reversed, and in the first half of 2020 this figure was 10.3% of GDP. However, Gvenetadze claims that the pandemic conditions have better-than-expected results in terms of exports of goods and remittances than the NBG estimated at the initial stage of the pandemic.
“Inflation-related changes are largely due to the depreciation of the nominal effective GEL exchange rate and the reflection of increased costs due to the pandemic in the final price,” Gvenetadze explained.
On the other hand, he emphasizes a slowdown in aggregate demand to reduce inflation, which reached 3.8% in September. According to the current forecast, under equal conditions, the downward trend in annual inflation will continue and it will be close to the target inflation in 2021.
The future dynamics of inflation is mainly determined by the weak aggregate demand, although the Monetary Policy Committee also took into account the uncertainty related to the acceleration of the spread of the virus and the increase of geopolitical risks, leaving the rate unchanged at 8.0 %.
It is estimated that the gradual exit from the tightened monetary policy - normalisation, and its pace will depend on inflation expectations and the dynamics of economic activity. Gvenetadze clarified that the forecast of the monetary policy rate does not represent the promise of the National Bank regarding future monetary policy decisions. It rather reflects the orientation trajectory with the assumption that exogenous factors will develop according to the scenario provided in the forecast or that no new exogenous shocks will occur.
Recall that the inflation target has been 3% in the medium term since 2018. However, the inflation target does not mean the maximum level of inflation or the inflation limit. In the inflation targeting mode, price stability is achieved with the lowest public spending, while long-term economic growth is the highest and most sustainable compared to other alternative regimes.
Amid a 12.3% slowdown in the economy in the second quarter of 2020, the number of employees fell by 1.9% year-on-year, according to the NBG's monetary policy report. According to the Central Bank, the annual decline in the salaries of employees in the country amounted to 2.5%, and in the second quarter of 2020 the average monthly salary of this figure amounted to GEL1,150.
“In the 3rd quarter of 2020, compared to the previous quarter, the nominal exchange rate of the lari against the US dollar strengthened by 1.1%, while against the euro it depreciated by 5.0%,” said the report.
“During the same period, the nominal effective GEL exchange rate strengthened quarterly by 0.7% and depreciated by 0.2% year-on-year. As for the exchange rate adjusted for the price level differential, in the third quarter of 2020, the real effective exchange rate depreciated by 0.9% on a quarterly basis and strengthened by 0.8% on an annual basis.”
According to the NBG, in September, compared to June, the annual growth of the loan portfolio decreased and excluded the exchange rate effect, amounting to 12%.
According to the NBG, the growth rate of loans to individuals during the period increased by 3.1% points to 12.1%, while the growth rate of loans to legal entities decreased by 7.7% points to 11.8%.
