BAKU, Azerbaijan, April 20
By Tamilla Mammadova – Trend:
The National Bank of Georgia remains appropriately focused on achieving its inflation target which is a cornerstone of Georgia’s macroeconomic policy framework, said Subir Lall, the acting Chief of IMF Mission for Georgia, Trend reports via Georgian media.
He made the remark during a video conference regarding the completion of the eighth review of the Extended Fund Facility supported program.
According to Lall, in this context, the most recent policy rate increase responds to elevated inflation expectations following a somewhat prolonged period of inflation exceeding its target. Monetary policy faces a difficult trade-off between supporting the economy and ensuring inflation remains well controlled and the National Bank (NBG) has been skillfully navigating this trade-off in an environment that has challenged policymakers everywhere.
"Under the circumstance, we believe continued adverse external developments may necessitate further policy rate increases if the National Bank feels it is needed to keep inflation expectations firmly anchored. We believe the floating exchange rate regime remains appropriate for Georgia. Maintaining macroeconomic policy discipline MS adhering to fiscal deficit and inflation targets would of course help contain depreciation pressures on the currency," he said.
"But in addition to the level of the exchange rate, there is the issue of its volatility. Of course, we understand foreign exchange markets can become disorderly, which could be disruptive to financial stability as Georgia remains a dollarized economy. Here, the NBG’s foreign exchange interventions to avoid disorderly market conditions can help dampen volatility, but they are in our view appropriately not meant to defend any particular level of the exchange rate," he noted.
Finally, and most importantly, the Georgian people have resolutely navigated what has been a difficult and indeed unprecedented global crisis and we are now seeing fortunately the light at the end of the tunnel, although we are not fully there yet," Lall said.
According to him, exchange rate flexibility is critical to ensuring that external shocks in a small open economy such as Georgia do not translate into greater volatility in output and employment. The exchange rate flexibility plays this critical role of shock absorber when shocks emanate from outside and are unavoidable and prevents these external shocks from excessively disrupting employment and output which would be detrimental to living standards, inequality, and the risk of poverty.
"The banking system entered the COVID-19 shock well-capitalized and with higher liquidity buffers; measures taken by the NBG in recent years improved the banking sector's capacity to withstand shocks. Credit growth has been resilient and bank capitalization remains broadly adequate notwithstanding an increase in non-performing assets and restructured loans. The NBG is actively monitoring the increase in non-performing loans and encouraging banks to promptly recognize losses. The buffers built in March 2020 from preemptive provisioning are still expected to be sufficient to account for the deterioration in asset quality due to the COVID-19 pandemic," he said.
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