Parliament Approves the Main Directions of the Monetary and Foreign Exchange Policy of the National Bank for 2022-2024

Parliament Approves the Main Directions of the Monetary and Foreign Exchange Policy of the National Bank for 2022-2024

16 December, 2021

The Parliament of Georgia voted in favor of the draft resolution "on the main directions of monetary and foreign exchange policy for 2022-2024", which was presented to the legislature by the Governor of the National Bank of Georgia, Koba Gvenetadze.


In accordance with the Organic Law on the National Bank of Georgia, Governor Gvenetadze presented to the Parliament of Georgia the draft of the “main directions of monetary and exchange rate policy” for the next three years, which reflects the inflation target, and the key monetary policy instruments used by the National Bank to achieve target inflation.


"In the inflation targeting regime, the inflation target is achieved by changing the key monetary policy instrument of the National Bank - the short-term interest rate (refinancing rate). The decision to change the policy rate is made by analyzing the macroeconomic environment, reviewing the situation in the financial markets, forecasting inflation dynamics, and assessing macroeconomic risks impacting inflation and inflation expectations. If the inflation forecast exceeds the target, the policy is tightened, and vice versa, if the inflation forecast falls short of the target, that is followed by the ease in monetary policy. Let me remind you that the National Bank has been implementing the inflation targeting regime since 2009, for 12 years now. During this period, the inflation target was initially 6%, then gradually declining and averaging 4.7%, while the average actual inflation was 4.3%. Given Georgia's economic development and regional challenges, this is a good indicator. From 2018 until today, when the inflation target has been reduced to 3%, average inflation has gone up to 5.4%, largely due to the pandemic. This broad picture clearly shows that the inflation targeting regime works well in the medium and long term and facilitates the process of price stability without additional economic costs and fluctuations in economic activity in the short term," Governor Gvenetadze stated.


The NBG Governor stated that inflation in 2021 is above the target: it was 12.5 percent in November. The reason for the increased inflationary pressure is the unforeseen circumstances posed by the global pandemic, as well as subsequent recovery processes. The speaker clarified that the growth of inflation was simultaneously influenced by various factors, including the global price rise for consumer goods. "Food prices have risen sharply over the past decade due to pandemic-related delays, poor harvests and increased transport costs. Rising food prices has particularly affected developing countries, where the weight of food in the consumer basket is higher than in developed countries. The weight of food in Georgia’s consumer basket is also high, making 29%. Therefore, the change in food prices has a significant impact on inflation, "- Koba Gvenetadze explained.


Governor of the National Bank of Georgia noted that inflation will begin to decline in 2022 and in other things being equal, it will gradually approach its medium-term target. He further noted that the expected dynamics of inflation and interest rates largely depends on how the pandemic circumstances will continue both in Georgia and in the world. "Vaccines are available and the vaccination is proceeding, but the spread of new strains of the virus remains a significant risk. Against this background, the pace of fully restoring global mobility and returning to a pre-pandemic state is unclear. Consequently, macroeconomic forecasts also show particular uncertainty. The estimate largely depends on the duration of the pandemic and the speed of vaccination. Such risks are of an inflationary nature and we remain committed to a tight monetary policy," Governor Gvenetadze added.


The NBG Governor stated that the presented monetary and exchange rate policy serves to improve the resilience of the Georgian economy to potential shocks and to promote stable and long-term economic growth. "In 2020, at the onset of the pandemic, the Georgian government and economic team managed to attract an unprecedented amount of aid from international donor agencies. The amount was spent to fill the budget deficit and finance expenditures, a portion of that will be spent this year and some next year as well. If not for the absolutely flawless monetary policy pursued by the NBG, the aid would not have come to the country," Koba Gvenetadze said.


After the report, Governor of the National Bank of Georgia answered the questions of the members of the parliament.