Monica Ellena in Tbilisi -
Georgia’s parliament has overturned the presidential veto on a controversial bill stripping the National Bank of Georgia (NBG) of its supervisory functions and transferring them to a separate agency under parliamentary control, highlighting ongoing frictions between the president and the government and raising concerns about the financial regulators’ independence.
The bill foresees establishing a separate Financial Supervisory Agency with a seven-member board to replace NBG’s currently authority over other financial institutions.
President Giorgi Margvelashvili vetoed the bill in late July, criticising both “the hasty process” through which it was adopted as well “its content”.
The regulation, first presented in the spring, has faced widespread criticism. In an open letter in late June, leading international financial institutions called on Prime Minister Irakli Garibashvili to keep banking, and the larger financial system, under the central bank’s surveillance, stating that the new structure would threaten the sector’s stability, and undermine prospects for sustained growth.
Slower growth, declining remittances, and shrinking foreign trade, coupled with a sharp devaluation of the national currency, the lari, against the dollar, have created macroeconomic headwinds. In this environment the IFIs think that “Georgian banks may need to raise capital to strengthen their balance sheets [and] uncertainty created by legislative changes and upheaval of banking supervision could jeopardise investors’ trust and thus complicate this task. Banks would then have to deleverage, which would hurt credit and growth.”
The parliament’s speaker, Davit Usupashvili, said on July 16 that the new regulation had been amended and put in line with the IFIs’ recommendations. However the key principle of removing banking supervision from the NBG remained unchanged.
“It is indeed an unconventional decision especially in the regional context where central banks proved to be the most efficient and independent state bodies, and have contributed to increase the confidence from both the general public and investors,” Oleg Kouzim, economist at Renaissance Capital told bne IntelliNews in a phone interview from Moscow. “The NBG has contributed at creating a stable banking sector and it is still unclear how a new body would do a better job,” said Kouzim.
Critics labelled the changes as politically rather than economically motivated. Tamaz Mechiauri, chairman of the Parliamentary Committee for Budgetary and Financial Issues, who co-authored the bill, claimed that the current board “does not reflect at all the interests of those forces which are currently in power".
All members of the board but one were appointed prior to the advent to power of Georgia Dream in the October 2012 parliamentary elections, including governor Giorgi Kadagidze whose seven-year mandate is expiring in February 2016.
Transparency at stake
Lawmakers from the ruling coalition Georgian Dream defend the changes as they will help to increase the “transparency” of the banking sector and its supervision, as well as increase “trust”.
Opposition parties have rejected this argument, with United National Movement (UNM) MP Khatuna Gogorishvili stating that “it is unclear why [the GD] deem [the process] to be non-transparent now”. The UNM and other opposition parties labelled the bill as a tool for ex-premier Bidzina Ivanishvili to control the system. Ivanishvili, the country’s wealthiest man who is believed to be still pulling the government’s strings, owns Cartu Bank, one of the country's leading lenders.
The relationship between the central bank and the government has been sour since the lari started devaluating against the dollar last November. In 2014 the lari averaged 1.9 to the dollar, but it dropped to GEL2.2 between January and June this year, and it has further weakened, with the central bank on August 25 lowering the exchange to GEL2.41 to the dollar. The lari traded at 2.35 on September 4.
In February Ivanishvili accused the NBG’s chief of not having intervened enough to uphold the lari, but Kadagidze stated that draining the central bank’s funds is “the wrong policy decision” as it would run through its reserves, which were $2.5bn as of August 31.
In a statement following a mission to Georgia in March, the International Monetary Fund (IMF) stressed its support for the “NBG’s policy to refrain from intervening in the foreign exchange market and allow the lari to float”.
“Spending reserves to cover up the fundamental shortages will not help at all,” Kadagidze told bne IntelliNews in an interview in March. “It would only postpone the problem, and will end up with devaluation later on, but at the same time we will be much less healthy because we’ll have lower buffers to prevent shocks later on.”
The financial regulation bill will now be sent again to the president to sign before it can go into effect. If he refuses to ink it, Georgia’s parliamentary speaker will do it.
Margvelashvili’s veto is not the first one and the saga adds another episode to the mounting disagreement between the president and the prime minister, which has been dominating the political scene over the last couple of years. During the parliamentary discussion, co-initiator of the bill Mechiauri called the president a “[George] Soros-ian NGO-shnik” who is “getting onto our nerves with vetoes”.
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