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Georgia Passes Controversial Banking Law Despite International Criticism

New banking legislation could exacerbate latent tensions between Georgian Prime Minister Irakli Garibashvili (left) and President Giorgi Margvelashvili.
New banking legislation could exacerbate latent tensions between Georgian Prime Minister Irakli Garibashvili (left) and President Giorgi Margvelashvili.

The Georgian parliament adopted on July 17 in the third and final reading by 80 votes to 19 a legal amendment transferring responsibility for banking supervision from Georgia's National Bank to a specially created new agency that would be wholly independent of it.

It is not clear to what extent the final version has been modified to address criticism from international financial organizations, which deemed the original draft law "not prudent."

The vote also risks exacerbating the latent tensions between Prime Minister Irakli Garibashvili, who expressed approval of the draft amendment, and President Giorgi Margvelashvili, who has indicated that he will not sign the bill into law.

The draft amendment, submitted to parliament in late May by two members of the majority Georgian Dream (GD) faction, envisages stripping the National Bank of its powers to supervise the entire banking sector and transferring those powers to a new Financial Supervisory Agency. That body would be headed by a seven-person board, of which the National Bank chairman will be an ex officio member; he may not, however, serve as the board's chairman, who will appoint the head of the agency. The remaining six board members are to be selected by the parliament.

The chairman of the Parliamentary Committee for Budgetary and Financial Issues, Tamaz Mechiauri, who co-authored the bill, implied that the rationale for it was as much political as economic. He claimed that the current composition of the National Bank board is detrimental to the interests of the current leadership. (All but one of its members were appointed prior to the advent to power of GD in the October 2012 parliamentary elections, and Mechiauri implied that their loyalty is to the former ruling United National Movement.)

Mechiauri further argued that depriving the National Bank of supervisory functions would discourage efforts by unnamed persons to speculate on fluctuations in the national currency, such as have taken place over the past six months. Georgian Dream founder and former Prime Minister Bidzina Ivanishvili laid the blame for the depreciation of the lari squarely on the National Bank and its chairman, Giorgi Kadagidze.

Critics Have Reservations

Business organizations, however, rejected Mechiauri's line of reasoning as an attempt to make the National Bank the scapegoat for those economic policies that had contributed to the loss in value of the lari. They also expressed concern over the impact of the proposed change, warning that the bill poses a threat to the business and investment climate, and to the concept of banking secrecy.

Transparency International Georgia expressed reservations, too, saying it is "incomprehensible how the stable functioning of the financial sector will be promoted without banking supervision which includes monitoring of capital adequacy, external inspection, asset classification, operational risk management, and provisioning requirements among other issues, which directly relate to the stability of the financial sector… Stripping the National Bank of its supervision functions will inhibit it from carrying out its duties as set out in the constitution."

President Margvelashvili's economic advisor, Giorgi Abashishvili, perceived "political reasons" behind the bill. He described the banking sector as one of the most robust components of the Georgian economy and asked why it should be necessary to fine-tune a mechanism that already functions perfectly well.

Abashishvili has also pointed out that amending the law on the National Bank without prior consultation with the European Union and European Central Bank constitutes a violation of Georgia's commitments under the Association Agenda it signed with the EU last summer.

International financial organizations too were perplexed by the proposed changes. Azim Sadikov, resident representative in Tbilisi of the International Monetary Fund (IMF), called in a written statement in early June for "proper consultations with key stakeholders and international experts," and affirmed the IMF's readiness to provide assistance.

Three weeks later, the IMF, together with the World Bank, the European Bank for Reconstruction and Development, and the Asian Development Bank, addressed a joint letter to Prime Minister Garibashvili and parliament speaker Davit Usupashvili explaining why they consider the proposed new model "not prudent" and fraught with "substantial risk to the independence and quality of supervision and to coordination with monetary policy."

They explained that "the tendency after the 2008-2009 global financial crisis has been to place banking supervision inside the central bank to strengthen linkages between monetary policy and financial stability. Such coordination is particularly important at this time, when the banking sector could come under strain from a slowing economic [sic] and Lari depreciation. Since Georgia is a small country, with only a limited number of financial sector professionals, having bank supervision inside the central bank has the added advantage of keeping specialized expertise under one institution, which contributes to efficiency and quality."

Presidential Veto?

The four organizations made clear that "we cannot support the initial legislative proposal," and unequivocally urged keeping banking supervision within the National Bank. They added that, if the decision is nonetheless taken to remove that function from the National Bank of Georgia, "it will be crucial that your proposals address the concerns raised above;" that they would be in line with the Basel Core Principles for Effective Banking Supervision; and that "the quality of supervision is not weakened during the transition to a new agency."

Despite that advice, which Garibashvili described as "very useful," the Georgian parliament passed the bill in the first reading three days later by78 votes to one.

Usupashvili for his part declared on July 10 that parliament would not pass the bill in the second and third readings until "mutual understanding" had been reached with the financial institutions that had criticized it. There has been no subsequent report of any such agreement being reached.

But Nodar Ebanoidze, one of the authors of the original amendment, told lawmakers on July 16 that the final version has indeed "been brought closer" to international standards, and the responsibility of the new supervisory body has been made even more stringent.

There has been no comment on the passage of the law from the Tbilisi representation of the IMF.

Should President Margvelashvili make good on his threat to veto it, the parliament is empowered to override that veto by a minimum of 76 votes.

About This Blog

This blog presents analyst Liz Fuller's personal take on events in the region, following on from her work in the "RFE/RL Caucasus Report." It also aims, to borrow a metaphor from Tom de Waal, to act as a smoke detector, focusing attention on potential conflict situations and crises throughout the region. The views are the author's own and do not represent those of RFE/RL.


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