Georgia - Banking, the Budget, and the Currency

Banking, the budget, and the currency

In the spring of 1991, Georgian banks ended their relationship with parent banks in Moscow. The National Bank of Georgia was created in mid-1991 as an independent central national bank; its main function was to ensure the stability of the national currency, and it was not responsible for obligations incurred by the government. The National Bank also assumed all debts of Georgian banks to the state banks in Moscow.

In 1992 the national system also included five specialized government commercial banks and sixty private commercial banks. The five government-owned commercial banks provided 95 percent of bank credit going to the economy. They included the Agricultural and Industrial Bank of Georgia, the Housing Bank of Georgia, and the Bank for Industry and Construction, which were the main sources of financing for state enterprises during this period. Private commercial banks, which began operation in 1989, grew rapidly in 1991-92 because of favorable interest rates; new banking laws were passed in 1991 to cover their activity.

Under communist rule, transfers from the Soviet national budget had enabled Georgia to show a budget surplus in most years. When the Soviet contribution of 751 million rubles--over 5 percent of Georgia's gross domestic product ( GDP) became unavailable in 1991, the Georgian government ran a budget deficit estimated at around 2 billion rubles. The destruction of government records during the Tbilisi hostilities of late 1991 left the new government lacking reliable information on which to base financial policy for 1992 and beyond.

In 1992 the government assumed an additional 2 billion to 3 billion rubles of unpaid debts from state enterprises, raising the deficit to between 17 and 21 percent of GDP. By May 1992, when the State Council approved a new tax system, the budget deficit was estimated at 6 billion to 7 billion rubles. The deficit was exacerbated by military expenditures associated with the conflicts in South Ossetia and Abkhazia and by the cost of dealing with natural disasters.

The 1992 budget was restricted by a delay in the broadening of the country's tax base, the cost of assuming defense and security expenses formerly paid by the Soviet Union, the doubling of state wages, and the cost of earthquake relief in the north. When the 1993 budget was proposed, only 11 billion of the prescribed 43.6 billion rubles of expenditures were covered by revenues.

Tax reform in early 1992 added an excise tax on selected luxury items and a flat-rate value-added tax ( VAT) on most goods and services, while abolishing the turnover and sales taxes of the communist system. In 1992 tax revenues fell below the expected level, however, because of noncompliance with new tax requirements; a government study showed that 80 percent of businesses underpaid their taxes in 1992.

In early 1993, Georgia remained in the "ruble zone," still using the Russian ruble as the official national currency. Efforts begun in 1991 to establish a separate currency convertible on world markets were frustrated by political and economic instability. Beginning in August 1993, the Central Bank of Russia began withdrawing ruble banknotes; a new unit, designated the coupon, became the official national currency after several months of provisional status. Rubles and United States dollars continued to circulate widely, however, especially in large transactions. After the National Bank of Georgia had been establishing weekly exchange rates for two months, the coupon's exchange rate against the United States dollar inflated from 5,569 to 12,629. In September all salaries were doubled, setting off a new round of inflation. By October the rate had reached 42,000 coupons to the dollar.

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