Georgia Cuts Rate to Spur Economy as Russia Maintains Its Grip

By Helena Bedwell and Maria Levitov

Aug. 21 (Bloomberg) -- Georgia, a third of its land under military occupation, cut its benchmark interest rate in an effort to shore up an economy that was already slowing prior to Russia's Aug. 8 invasion.

The National Bank of Georgia, the nation's central bank, reduced its key rate yesterday to 11 percent from 12 percent to counter the war's effects on economic growth, officials said in Tbilisi, the capital. ``Our first and main goal is to keep macroeconomic stability,'' David Amaglobeli, the bank's acting chairman, said in a telephone interview.

Amaglobeli reiterated the bank's forecast for growth of about 9 percent this year, down from 12.4 percent a year ago. ``I think we've lived through the worst period already, when military actions were going on,'' he said.

Others say he may be overly optimistic. ``The displacement of people, disruption of trade and some damage to infrastructure will affect economic growth,'' said Edward Parker, an emerging- markets credit analyst at Fitch Ratings in London, which along with Standard & Poor's cut Georgia's below-investment-grade credit rating when fighting began.

Since the start of the war, Georgia's five-year bonds have tumbled, pushing yields to 10.2 percent from 8.5 percent, and oil shipments have been disrupted. Russia, which has resisted western calls for a withdrawal, still controls the Black Sea port of Poti and the crossroads city of Gori, cutting off the west from the east.

Still, with Russia no longer bombing or threatening Tbilisi, life has begun to return to normal in the capital, said Vladimer Papava, an economist at the Georgian Foundation for Strategic and International Studies.

`Some Panic'

``There was some panic on Aug. 11 when they said the Russians were coming to take Tbilisi,'' Papava said. ``The ground was shaking and people were running and queuing for food. But it was short-lived.''

At Populi, the nation's biggest supermarket chain, with 33 outlets, prices are the same as they were before the conflict started because demand and supply haven't changed.

``We're not experiencing shortages, or even warnings of any from our suppliers,'' Populi spokeswoman Lika Mikautadze said.

Inflation will probably slow to 8 percent this year from last year's 11 percent, according to the central bank.

Factories across all industries have continued to operate and there are ``more than enough'' oil and diesel supplies, Finance Minister Nika Gilauri said yesterday.

The government has been paying pensions and salaries on time. And while banks, led by London-listed Bank of Georgia, lost about 10 percent of their deposits immediately after the invasion, money has begun returning, said Amaglobeli. ``The banking sector has showed resilience during the crisis,'' the central bank said in announcing the rate cut.

Oil Shipments

All rail and pipeline shipments of oil were stopped at one point and supplies haven't fully resumed. About 5 percent of GDP is derived from fees for such shipments, the central bank says.

With Russian troops still blocking railways, Georgia's Black Sea ports are running out of crude oil and oil products, said Vako Kavzharadze, an agent in Batumi for TeRo Co. Ltd.

``The country, from every perspective, not purely economic, needs a return to security and stability,'' Fitch's Parker said. A secure peace with Russia ``is far from certain.''

Supporting a key ally and a government that the World Bank last year called the world's ``top economic reformer,'' the West has promised financial assistance.

International Aid

U.S. Senator Joseph Biden, a Delaware Democrat, said he'll seek $1 billion, about a tenth of the nation's $10 billion GDP, when Congress reconvenes next month. The finance ministers of the Group of Seven industrialized countries said yesterday they will work with the International Monetary Fund to ``reinforce the soundness of Georgia's economic reform program.''

That kind of support is enough to provide ``a positive outlook'' for Georgia, said Martin Blum, head of emerging-market economics and strategy in Vienna at UniCredit SpA, the largest bank by assets in eastern Europe. U.S. aid may be ``quite meaningful'' to the Georgian economy, Blum said.

Roy Southworth, World Bank country director for Georgia, last month praised the government of President Mikheil Saakashvili, 40, for promoting growth, reducing poverty and fighting corruption. ``There's 24-hour electricity countrywide, social reforms and transparency in business,'' Southworth said.

To contact the reporters on this story: Helena Bedwell in Tbilisi hbedwell@bloomberg.net; Maria Levitov in Moscow at mlevitov@bloomberg.net