VETO-supporting Arguments Contradict Recommendations of International Organizations
The National Bank of Georgia (NBG) keeps ignoring recommendations of the International Monetary Fund (IMF). As a result, various aspects of the Georgian economy suffer from negative affects, the Association of Young Financiers and Businessmen (AYFB) says. International organizations positively appraise the NBG performance, in whole. As a result, illusions are created as if the NBG makes no errors and its policy fully complies with current economic challenges, AYFB says.
Unfulfilled recommendations blink behind the positive evaluations the international organizations are making and this fact negatively affects the economic processes. Frustration in the national production, devaluation of revenues of businessmen and consumers, unbearable aggravation of the credit burden, economic growth suspension, hike in deficit – this is an incomplete list of the outcomes in the aftermath of ignoring IMF recommendations. The crisis will deepen if the current reality does not change.
Despite IMF recommendations and requirements, the NBG has not formed a regime of contra-cycle capital buffers for the bank system. Moreover, the central bank has not introduced the loan to value adequacy principle (the loans and capital long-term value principle for borrowers) and the revenues parity principle (payment-to-income). Consequently, the heaviest situation is expected in the bank sector. Namely, commercial banks do not provide adequate financial injection to the national production, because they follow the current mechanisms of risks evaluation, in accordance with the NBG requirements.
Moreover, unhedged demands are credited contrary to the IMF requirements and in accordance with the NBG regulations. For example, loans are issued in USD to the clients, who receive salaries in GEL. Consequently, currency risks are shifted to the clients. This problem was clearly outlined during the recent currency fluctuations, when many citizens have to serve considerably increased loan liabilities. This is the effect of ignoring the IMF recommendations.
Instead of restricting the issuance of unhedged loans, that is, an issuance of foreign currency denominated loans to the GEL-paid employees, the NBG policy shifted the currency risks completely to the borrowers, who in most cases are not aware of financial details. The national bank has in practice abandoned this category of our citizens, as borrowers have to deal with heavy currency risks arisen in November 2014. Currently, borrowers have to serve 30% more expensive loans.
The IMF report positively appraises the NBG monetary policy, but prudential management issues are criticized. At the same time, the current adapted practice of the monetary policy, according to the IMF report, can bring positive results amid the stable exchange rate, not amid the GEL current fluctuations. Consequently, the excessive supply of GEL must be revised, because this policy further deteriorates the GEL condition.
The NBG ignores other instructions of the IMF too. Namely:
– Despite the promises to the IMF, the NBG has not set up a financial stability committee that would establish prudential regulations.
– Since 2012 the NBG has not published a financial stability report that must be developed every year by the IMF requirements in line with international standards; Finally, the NBG’s current policy encourages a growth in consumer loans and aggravates the burden of deficits. On the second hand, the current system of risks management hinders a growth in activities in the production sector of bank institutions. As to the law on bank sector supervision, the president has vetoed it. The separation of the supervisory functions was to create a good precondition to create valuable efficient macro prudent body accountable before the parliament in line with recommendations of the European System Risks Board (ESRB).
In this situation the president’s veto is absolutely unclear and inadequate decision, especially on the ground of Safeguard and FSAP documents, because the first one has no relation to the bank sector supervision and it only regulates the NBG principles for internal accountability, while the FSAP in the banks supervision part is fully based on the ESRB requirements that does not oblige the national bank to control macro prudent policy. The main principle implies accountability of the supervisory body before the parliament and the bill includes this.
Thereby, we would like to note that ignoring these principles will part us from the EU bank supervision framework requirements.