Setting Policies in Good Times Revisiting Policies in Bad TimesComplementarity of Fiscal, Monetary and Debt Policy

David Lezhava, Deputy Minister of Finance of Georgia

For the World Bank's Annual Stakeholders' Forum of the Debt Management Facility

June 3-4, 2015

Manila

Outline

Central Bank’s Monetary Policy

Debt Policy of the Ministry of Finance

Policy debate under the External Shock

2

Monetary Policy

Monetary Targeting

– Main instrument: NBG Certificates of Deposits (since 2006)

Inflation Targeting

– Main instrument: one-week refinancing loans (since 2008)

3

External Public Debt Portfolio Average Weighted: - Interest Rate 1.9%- Contractual Maturity 23 years

Affordable Public Debt Stock and Very Low Interest Rate on External Public Debt

External Public Debt by Interest Type: Interest Rate Risk Brought to a Minimum

4

Currency Composition The Five Biggest Donors ( ml USD)

Domestic26%

Multilateral 51%

Bilateral 14%

Eurobond9%

External74%

Fixed74%

Variable26%

USD31%

EUR17%

SDR48%

Other4%

WB, 1,771

ADB, 605 KfW, 296

EIB, 242

IMF, 212

Others, 1,074

Public Debt Performance

Greater Focus on Domestic Borrowing

MOF has been issuing T-bills since 2009 .

In addition with T-bills MOF is issuing 2,5 and 10 years T-notes

5

12 - month27%

2 - year33%

5 - year32%

10 - year8%

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2009 2010 2011 2012 2013 2014 2015 pr

mln

GEL

6 month 12 month 2 year 5 year 10 year

Why is coordination important?

There are no conflicting actions;

Joint efforts aiming at specific issues mightyield better results;

Increases credibility in policies.

Coordination

the Central Bank and the Ministry of Finance

7

Shared Policy Priorities that Benefit All

Inflation targeting is the most appropriate monetary policy ER flexibility

Inflation is the major (if not the only) task

Refinancing is the main instrument

Transmission mechanism needs to be improved

Share of domestic debt has to increase Lower risk, lower price

Capital markets development

Growth supportive fiscal policy Long term local currency lending support program

8

Long term local currency lending support

program

9

MOF issues government paper

Commercial Banks buy government paper on

the Auction

Money

Deposits +1%

CBs use government paper as a collateral and get loan

from the NBG

MOF and NBG coordination: T-bills and CDs

NBGMOF

2006

2016*

Started issuing 3 and 6 months CDs

NBG to stop 6 months CDs

NBG to phase out CDs and build Treasuries Portfolio

MOF to start issuing 6 months T-bills

Started issuing T-bills 2009

2018* NBG to stop CDs and move to classical OMOs

MOF to gradually continue issuing more debt

MOF the only issuer of public debt

* Note: these are currently under discussion

2010 Started issuing T-notes

All is Fine in Good Times

End of Part 1

To be continued…

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External Shock

Export percentage change (YOY) Remittances percentage change (YOY)

12

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Jan-14 Feb-14 Mar-14 Api-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Api-15

1.6

1.7

1.8

1.9

2.0

2.1

2.2

2.3

2.4

Jan-14 Feb-14 Mar-14 Api-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Api-15 May-15

ER (GEI/USD)

crises line

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

IV 13 I 14 II 14 III 14 IV14 I 15

GDP growth

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

crises line

Policy reaction at EX shock

Excessive local currency is considered to be in fault

MOF’s tightening didn’t led to desired outcome

MOF ceased Long term local currency lending support program

NBG spent 10 % of the country’s foreign exchange reserves without any

effect

NBG has decreased size of CD auctions

NBG has increased refinancing rate from 4 to 5 %, without any noticeable

effect

13

Coordination in Bad Times

14

Policy reaction on EX shock

Values depreciated in parallel with local currency

NBG refinancing volumes raised questions

Large volume of treasury securities raised questions

MOF program Long term local currency lending support was blamed

15

Lessons learned

When planning in good times be aware of bad times;

Critical mass of professionals needs to be involved;

IFIs play important role.

16

Thank you!

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