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Creating a healthy banking system for Georgia

By Giorgi  Kadagidze

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A central bank cannot succeed without a successful economy
When you pursue sound policies during good times, it is easier to deal with the bad times.

This is one report from a series

Georgia: investing for change

After the 2008 war and financial crisis, the international community including the EBRD came to Georgia’s aid with a pledge of US$ 4.55 billion. But unlike many other countries, the banking system in Georgia’s system never stopped lending to businesses, rebounded strongly, and growth returned very quickly.
In large part this was because our financial system has been and remains very well capitalised and regulated. Yet it is also one of the most liberalised in the world.
When we started rebuilding the banking sector, we had to move quickly. We had lost a lot of time and opportunity for growth in the 1990s while central and eastern Europe surged ahead. But quickly did not mean hastily. Reforms worked and continue to work because they were carried out in the right order. 
In 2009 we started with the development of the money market, building up the interbank and FX market and launching swaps and forward transactions. In the early 2010 we strengthened the legal and regulatory framework and adopted a very conservative approach to bank capitalisation well before the Basel 2 and 3 accords on banking supervision.
2009 saw the introduction of government bonds tradable on Bloomberg and demonstrating the ability of Georgia to raise money on international markets. The EBRD played the role of pioneer in bond issuance.
We strengthened our domestic banks and our two largest banks – half of the banking system - were listed in the London Stock Exchange in partnership with the EBRD in 2012 and 2014.
A very important step forward was the first issue of lari-denominated paper by the EBRD in 2014. We worked closely together with the ERBD to clear all the legislative hurdles in the process, including amendments to the Tax Code and changes in Central Bank regulations.
And we have a clear plan for the future. The next step for us is to launch bond issues in the corporate sector so that large companies can also follow this path. As soon as there is a critical mass of companies issuing bonds, we shall work on the development of a private secondary market to which liquidity will be added gradually.
In time, a pension reform will be carried out and we will be ready to develop equity markets. And this is the right way to go about it – step by step, in the right order.
But reforming the banking sector is not enough. A central bank cannot be successful if the economy is not successful. After the break-up of the USSR, Georgia lost 70 per cent of its GDP – one of the steepest losses anywhere in the world – and was overrun with corruption, criminality, bureaucracy and everything that makes a failed state a failed state.
Today, we are a success story and feature in the top 10 of the World Bank’s Doing Business rankings. But Georgia is still a low income country. The next decade should be dedicated to becoming a middle-income country and reaching a target of US$ 10,000 per capita.
The fundamentals are already in place. We have a healthy, well capitalised banking system, prudent monetary and fiscal policies. What we need now is “second generation reform”. We need to increase know-how in the real sector and produce goods and services that are competitive with those in the developed countries.
There are already a number of success stories. Take the tourism industry, for example. In 2006 the numbers were so small that we were not even counting revenues in the balance of payments. Today we receive 5 million visitors a year and tourism is one of our largest sectors and sources of revenue.
Re-export of cars is now a US$ 800 million industry which brings us jobs not only directly in resale, but in insurance and brokerage, in repair and all the associated services.
We can develop health tourism for the region. We can be an energy hub. We can offer transit routes for data transmission. Everything is doable and possible. We only need hard work and no compromise in our determination to reform.
Giorgi Kadagidze is the Governor of Georgia’s National Bank
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