TBILISI

Georgia’s National Bank kept its key refinancing rate unchanged at 9.5 percent, its highest since 2008, to keep inflation in check as the COVID-19 pandemic pushed up the price of oil and gas imports.

The central bank’s monetary policy committee raised the rate to 9.5 percent from 8.5 percent at its last meeting in April. It had previously raised it to 8.5 percent in March after keeping it unchanged since August.

Inflation has exceeded the central bank’s 3 percent target for several months. Annual price growth was 7.7 percent in May, up from 7.2 percent in April. On monthly basis, consumer prices were up 0.7 percent in May from a month earlier after rising 0.9 percent in April and 0.2 percent in May 2020.

Rising prices in world agricultural markets, compounded by exchange rate depreciation in previous periods meant the impact of imported goods and food prices on inflation was still high, the central bank said.

“At the same time, globally rising oil prices are leading to higher fuel prices and, consequently, an increase in its contribution to inflation,” the central bank said in a statement. “In addition, amid rising gas tariffs in Tbilisi, the impact of utility bills on inflation is expected to increase further from June.”

The bank said that annual inflation was expected to peak in June, and will average 7 percent in 2021.

“With the long-term maintenance of tight monetary policy and the expected mileage of single exogenous factors independent of monetary policy, it is projected that inflation will gradually approach the target in 2022,” it said.

The central bank forecasts economic growth of about 4 percent in 2021, in contrast withthe government, which expects growth to exceed 7 percent.

Georgia’s gross domestic product (GDP) grew by 8.1 percent year-on-year in January-April 2021 after contracting 3.6 percent  in the same period last year, as the country eased the majority of the restrictions it had imposed to curb the spread of coronavirus.

In April alone, the economy expanded by a record 44.8 percent, compared with a 16.6 percent contraction a year ago. Growth was recorded in all sectors of the economy except for the mining industry.

“There are signs of intensification of foreign demand, however, in general – in terms of tourism – compared to the situation before the pandemic, it remains reduced,” the National Bank said.

According to preliminary data, exports of goods in May increased by 45 percent and slightly lower than the same figure in May 2019. Revenues from international travelers increased 8 times year-on-year in May, though the decline from the same period in 2019 is 73 percent.

The International Monetary Fund said in April 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”.

According to the World Bank latest projection, economy is expected to expand by 6 percent this year and 5 percent in 2022.

The 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 Bank’s monetary policy committee will be held on August 4, 2021.