TBILISI

Georgia’s National Bank has raised the key refinancing rate to 9.5 percent from 8.5 percent high annual inflation and situation in the country’s main trading partners.

At a previous meeting in March, the bank’s monetary policy committee raised the rate to 8.5 percent from 8 percent, level, which had not been changed since last August.

Annual inflation stood at 7.2 percent in March, beyond the 3 percent target.

National Bank said that the reduction of inflation since last December was related to the subsidization of utility fees, although it was of a temporary nature. The end of this subsidy in March 2021 was reflected in the upward shift of inflation.

“Given the changed circumstances since the previous meeting, according to the updated forecast, other things being equal, inflation will average around 6.5 percent in 2021 and then gradually approach the target,” the bank said in a statement.

National Bank projects economic growth at about 4 percent in 2021.

The country’s gross domestic product declined by 8.3 percent year-on-year in January-February this year, compared to 3.7 percent growth in the same period in 2020.

“Based on rapid estimates, economic activity fell by 5.1 percent year-on-year in February, while, amid easing of restrictions since the start of the year, a gradual recovery of economic activity is expected from March, the main driver of which will be domestic demand,” the bank said.

“In contrast, external demand remains significantly reduced compared to the pre-pandemic situation,” it added.

The International Monetary Fund said earlier this month that “a strong recovery is expected to commence in the second quarter of 2021, and output is expected to expand by 3.5 percent for the year”.

National Bank said that it had also taken into account that the recent developments in the trading partner economies had, to some extent, also been transferred to the local foreign exchange market.

“Given the high dollarisation of the economy, this puts even more pressure on prices … Moreover, there is high uncertainty remaining about the prospects of the tourism industry in Georgia as well as globally,” it said.

Revenues from international travelers are down by 60 percent year-on-year in March, while the drop since the same period in 2019 amounts to 88 percent. As for imports of goods, an annual growth of 18 percent was recorded in March.

National Bank said that starting from July, the minimum reserve requirements for funds attracted in a foreign currency would be determined individually, for each commercial bank, according to the deposit dollarisation of each bank.

In particular, unless the deposit dollarisation rate exceeds 40 percent, the reserve requirement norm will be reduced to 10 from 25 percent for funds borrowed in a foreign currency and with a remaining maturity of up to 1 year.

If the deposit dollarisation is 70 percent or above, reserve requirements will still be 25 percent. For the deposit dollarisation in the range of 40-70 percent, the reserve requirement norm will decrease linearly to 10 from 25 percent along with a decrease in the deposit dollarisation.

The reserve requirement will be reduced to 10 from 15 percent for foreign currency-denominated funds with a remaining maturity of 1 to 2 years.

“This change will help to intensify competition in the lari deposit market, gradually increase the demand for lari and ease the pressure on the foreign exchange market,” the bank said.

The next meeting of the National Banks monetary policy committee will be held on June 23, 2021.