According to the data of November, the annual inflation in the country reached 12.8%, which is a record figure of the last 10 years. According to the forecast of the International Monetary Fund (IMF), inflation in Georgia will continue to grow and will reach 13.1% at the end of 2021, which is lower than the rate of only 15 countries in the world.
Compared to the previous year, the prices of basic food products have increased dramatically: the price of vegetables has increased by 43%, bread products by 19.4%, oil and fat by 31.6%, milk, eggs and cheese - by 18.2%. with
What does the dramatic increase in prices mean for the citizens of Georgia, is it the result of the government's failed economic policy, and how can the current dynamics be reversed?! Dean of the Business School of Free and Agrarian Universities, financier Giga Bedineishvili answers our questions.
What is inflation and what are the practical implications of rising inflation for the citizen?
- Inflation is simply the definition of an increase in prices. This is a measurable parameter that they try to see how quickly prices are rising.
The increase in prices, in itself, of course, affects our daily life, well-being. In principle, in various economic schools there is a widespread attitude towards inflation, that a small inflation always exists in the economy and is normal. Some people agree with this, some people don't, but basically if you look at the mainstream of what various economists think, some level of inflation is normal.
The normal level of inflation may be different in different countries. In our country, the National Bank aims at 3% inflation, in America at 2%, in Switzerland at 1%.
Ultimately, however, when prices rise faster than incomes, our welfare deteriorates. This is the main thing with which inflation hits us.
The increase in inflation can be caused by many factors. President of the National Bank, Koba Gvenetadze, said that the increase in inflation is mainly related to post-pandemic factors and the increase in international prices. To what extent do we have reason to believe that these two factors are the main contributors to inflation growth?
- The President of the National Bank, of course, does not mention the third important factor. However, to be fair, due to pandemic-related reasons, it has become difficult to provide various services and products worldwide. A good example of this is the sharp increase in the cost of containers. The price of renting containers for product transportation has increased dramatically - this leads to an increase in transportation prices, which, in itself, increases the price of imported goods.
The second important factor is oil. This is a self-created problem by Americans and Europeans. 2-3 years ago, America produced so much oil that it did not need to be imported. However, the Biden administration's instinct is to reduce oil production, which is justified by the fight against climate change, even though there is no evidence that oil production is directly related to climate change. An increase in gas production, on the other hand, has had a positive effect on climate change by replacing a much dirtier fuel, coal.
Decreased oil and gas production in America - when supply decreases and production decreases, naturally prices increase and we become more dependent on OPEC and Russia, who are not very reliable people and in many cases use the price of oil and gas for political purposes. We have many examples of this. Therefore, it is clear that the increase in the price of oil and gas also affects the prices of other products.
There is also a monetary reason that causes inflation to rise. Specifically, that too much money was printed. Modern monetary policy works a little differently - it doesn't mean that more banknotes have been printed, but monetary policy has become much softer almost everywhere in the world, first and foremost - in America, because the dollar is still the world's reserve currency. The money supply increased a lot, and to the surprise of many, this fact was presented to us as if it should not cause inflation. First they said that it would not cause inflation, and when it did, they told us that it was not inflation, which is an absolutely demagogic argument, and even today the US Federal Reserve, the National Bank, is in such a position that this period will pass and we are dealing with transitory inflation, which is ridiculous. - they have been saying for a long time
So, yes, there is this trend in the world - increased liquidity, demand shocks - these two factors that the President of the National Bank mentioned are indeed there.
But a third important factor is added to this, in the case of Georgia, which we cannot blame either Powell or Erdogan. This is the much softer monetary policy chosen by the National Bank in recent years. We had a rather strict monetary policy, and in the last 7-8 years, somehow, it has been softened, and this, of course, leads to an increase in inflation. The refinancing rate should be higher than it is now. In addition, the structure of our economy is different in the sense that most of our consumer goods are imported - therefore, the exchange rate of the lari is also a very important factor. When the GEL weakens, the price of imported products increases.
Added to this are the absolutely stupid initiatives of the National Bank against overindebtedness and the senseless programs of lariization, which brought the opposite results of what the National Bank intended, because the exchange rate is significantly dependent on confidence. When the government forcibly charges any currency, it naturally reduces confidence in the lari dramatically.
Soft monetary policy, reduced confidence in the GEL and very slow economic growth, which in itself is a negative factor for the local currency.
Accordingly, if we would conditionally distribute the blame, we can blame the world for 30% of our situation, but 60-70% of the problem is created by us.
In what cases is high inflation dangerous?
- High inflation means that the price of money increases. In conditions of high inflation, if you decide to invest in any project, you should have a much higher return to compensate not only for the risk you took, but also for inflation. At this time, the question naturally arises: what can you buy with the money you will take from the project?
High Inflation Means High Interest Rates - High interest rates, in other words, expensive money, is one of the obstacles to economic development, because high-return projects are much smaller, therefore, because of inflation, many fewer projects are implemented - when money becomes expensive, Economic activity is declining.
Along with the increase in prices, in the data of the National Bureau of Statistics, we read that the average salary in dollars in 2020 has decreased by 63 dollars compared to 2012. Does this directly mean that citizens earn less and pay more?
- There can be an argument that it does not mean directly proportionally, but, in fact, it does. We often hear an absolutely wrong argument, including from the National Bank and their supporting economists, that we should not count revenues in dollars, but we should look at the so-called real economic growth, and the small, 2-3% economic growth over the last 8-9 years is really we have.
However, this is not correct. It is not correct to look at the state of the economy with economic parameters. Recent moods and people's perceptions matter a lot. It cannot be ignored that in dollar per capita terms our economy has not actually grown in the last 8-9 years. As it was $4,000 per capita 10 years ago, it is the same today. When people see that incomes expressed in dollars have decreased, you cannot convince them by talking about economic growth in some calculations.
We talk about the economy so that people can feel the improvement of well-being. This is our task. It is important to feel the direction. Even Dovlat does not matter as much as the positive movement that the country is going somewhere and we are supporting someone.
And we seemed to be moving and stopped and have been stopped for years. If you can't grow the economy for 10 years with per capita income expressed in dollars, it means that you actually stole the time of an entire generation. Within 9-10 years you can double and triple the economy.
I will tell you more, per capita income in dollars during the previous government actually quadrupled. It was 1,000 dollars per capita when Shevardnadze's regime ended, and when the Georgian dream came, it was 4,000 dollars. The national currency also strengthened. Before the Rose Revolution, 1 dollar was worth 2.5 GEL, and the Georgian Dream took over the country in which the dollar exchange rate was at 1.65 GEL, and they devalued the GEL 2 times.
To say that rapid economic growth and strengthening of the GEL is impossible in Georgia is a crime. We have an invaluable resource for productivity development. The fastest way to improve productivity is to bring capital into the country. Capital comes with know-how, with knowledge, with labor tools, and for our economy, which is in dire need of capital, unfortunately, we are very buried in that aspect as well.
Accordingly, knowledge does not enter, capital does not enter, know-how does not enter, and we cannot increase productivity. We hope that the government will select good projects within the framework of "Produce Georgia" or some partnership fund will make an amazing investment decision regarding the restoration of Georgian pigs. This is absurd, there are blue mountains when we can do what lies on the surface. It's doable and instead we've been stuck in one place for 10 years.
According to the IMF forecast, Georgia ranks 16th in terms of inflation rate. Why can the Georgian economy cope less effectively with the challenges posed by the pandemic and the increase in international prices than almost all countries of the world?
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- This is an alarming data. I would say that this is the result of the quite silent but fundamental change in monetary policy, which has been going on for a long time in Georgia. Our monetary policy is similar to the monetary policy of Turkey. Turkey is traditionally a country with a soft monetary policy. If you ask me, they are also making a mistake - the Central Bank of Turkey is so submissive to Erdogan that they are on a very bad path, but inflation was high in Turkey and although it hindered the development of the economy, so were the expectations.
This change happened with us during the last years and we moved from a relatively strict monetary policy to a soft monetary policy, and therefore, it can be said that, in that sense, there is a trend, and the figures that we see are the expression and manifestation of this trend.
In addition to monetary policy, what other domestic factors lead to inflation?
- I don't want to sound overly philosophical, but, in principle, many people, including Giga Bokeria, often and absolutely rightly mention that we are moving into the role of a "nanny government". The general attitude of the government towards the population is that we don't know and we have to believe them. That they will do everything, they will select the projects, they will take our money and distribute that money properly, they will do what we have to do, they will protect us from excesses, they will save us money in pension funds, against our will, because we really do not understand how to do it. We can't put money into the bank account ourselves, so they take our money out and they put our own money into the bank account - which is effectively what the pension tax means.
This fundamentally wrong approach to the economy and economic policy was manifested in everything, especially in low economic growth, the need for debt growth, etc.
At the level of instinct, the Georgian Dream understands that this model prolongs its stay in power. A model in which the government controls as much of the government and finances as possible and then distributes it manually. This contributes to the so-called identity politics. Then they divide people into groups and say - these are ours, they are enemies, let's employ ours, give them tenders, let them into businesses, leave the enemies out. It's all part of one big approach. It is not necessary to have a well-ordered doctrine, but they also understand at the level of instinct - from Bidzina Ivanishvili to the leadership of the local municipality, that they need money to be distributed manually, including during elections, and therefore stay in power for a longer time.
I, of course, believe that this approach will ultimately weaken the Georgian dream and will end very badly for them politically, but they don't know anything else.
According to Saxstat, the prices of basic food products have increased dramatically. What impact does the dramatic increase in prices have on the life of an average Georgian family?
- If we look at the consumption structure of an average Georgian family, it differs sharply from the consumption structure of a Swiss family, because a much higher percentage of income is spent on the so-called non-discretionary, forced expenses: food and basic needs. If a Swiss family is hit by inflation, it can put off buying luxury items for a while. However, at such times, the Georgian family has to decide whether to eat relatively nutritious food or less nutritious food.
At the same time, it is impossible for the continued high inflation in a poor country not to affect people's health. It can be said that such economic hardship directly translates to people's health - it is a fact that there is a correlation between wealth and life expectancy.
People in rich countries live longer. Therefore, yes, one of the main factors of high mortality is a bad economy, and one of the obvious manifestations of a bad economy is high inflation.
What can change the current dynamics?
- I don't want to be too prosaic and predictable, but what needs to be done has already been said too many times. It is necessary to give the economy as much as possible the opportunity to breathe.
To do this, we need to operate the economy on the lowest possible taxes, reduce as much as possible and even eliminate waste, reduce regulations, reduce or cancel the excise tax on gasoline - because the fact is that the price of gasoline hurts the economy, and the excise increases the price of fuel in direct proportion.
The only solution is this. I don't mean that we have to make a very dramatic change in terms of regulations or cutting red tape, but ultimately we have to understand that we can't get rich without it. If we do not bring our economy to a much lower tax regime, we will not have economic growth.
In addition, it is important to have an independent judiciary in the country. The current situation, when the entire state system actually serves one family, can never guarantee good economic results.
But in reality, unfortunately, we are talking about our wishes, not reality. Coming back to the topic, controlling the budget and revenues as much as possible for this government is a management style and necessity. They think so.
This is what should be done, but the Georgian dream does not seem to do it.
Finally, when discussing the solution, we come to the necessity of political change.
- Yes, I would say that I do not see any resources in the Georgian dream . You know what, even if they want to, they think they can't. All the steps we have considered mean weakening their influence on power. They consider the loss of power to be the end of the world.
Today, many people are already talking about the fact that under the Georgian Dream government, democratic institutions have not developed - any step towards political freedom is a risk taken in the direction of maintaining power. Can we say the same about reforming the economy? Are more economic freedoms and less government control an inherent threat to the Georgian Dream government?
- Yes, that's right. Actually, the answer is in this question. But I would say that not only today, the fact is that based on Ivanishvili's personality and his dominant role over the years, it was obvious from the beginning that his strategy for maintaining power would be what we see now.
Only the economic policy, lack of reforms and stagnation that we have in the country would be compatible with this strategy.
Today we simply see that they are using more and more desperate methods to stay in power, and this is entirely due to their position being shaken - they are on the edge and need more aggression than they needed before.
However, if we look from the perspective of the years, we should not be surprised that Ivanishvili's regime, in the end, produced exactly the same results economically as politically.