Open Market Operations in Georgia

1
Open Market Operations in Georgia
National Bank of Georgia Foreign Exchange and
Monetary Operations Department David Papuashvili
George Darchia
2
Overview

• Macroeconomic Scheme
• Monetary Policy Objectives
• Monetary Policy Instruments
• Open Market Operations
• Background
• The use of CDs (NBG certificates of deposit) in
  open market operations

3
Macroeconomic Scheme

• The Parliament Budget and Finance Committee
  together with the Ministry of Finance and the
  National Bank of Georgia are responsible for the
  economic policy of Georgia.
• The Foreign Exchange and Monetary Operations
  Committee of the NBG determines the macroeconomic
  and monetary policy of the nation.

4
Monetary Policy Objectives

• In accordance with the Organic Law, one of the
  main objectives of the National Bank is to
  attain and maintain price stability which
  implies the existence of moderate and predictable
  rate of inflation.
• In the context of maintaining price stability,
  the monetary policy conducted by the National
  Bank of Georgia is oriented towards the
  non-inflationary supply of money and gradual
  increase of monetization of the economy in
  consistence with economic growth and demand on
  money.

5
Monetary Policy Instruments

• Open Market Operations
• Reserve Ratio
• Standing Facilities (Currently Inactive)
• Interbank Credit Auction
• Note At present, the NBG carries out its
  monetary policy predominantly through open
  market operations (the sale of central bank
  securities)

6
Open Market Operations

• The primary monetary policy instrument of the
  NBG.
• The open market operations are carried out
  through the sale of National Bank Certificates of
  Deposit (CDs).
• Repos/Reverse Repos are currently inactive but
  will be restarted in the near future.
• The NBG decided to issue CDs in September of
  2006, at a time when the MOF stopped issuing
  T-bills and all outstanding government securities
  were redeemed.
• Simultaneously (September, 2006) the NBG stopped
  intervening in the interbank credit market and
  the facility attained a function of liquidity
  distribution between commercial banks.

7
NBGs Case Why CDs?

• Reason need for a sterilization tool
• Lack of treasury securities
• Alternative direct deposits from commercial
  banks
• Disadvantage deposits are not marketable

8
Certificates of Deposit General Characteristics

• Issued by the NBG
• Short-term, discount Securities
• Nominal (Par) Value 1000GEL
• Standard Maturities 7, 28, and 91 days
• CDs are sold only to commercial banks.
• May be used as collateral between the NBG and the
  commercial banks.

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Certificates of Deposit Operational Information

• Securities are sold via auctions
• Auction Method multiple-price
• Frequency of Auctions daily
• 28-day CD auctions held three (3) times per week.
• 7 and 91-day auctions held two (2) times per
  week.
• Yield 2-12.
• Stock (as of March 31, 2007) GEL258mln/USD152mln.

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Certificates of DepositDistinctive features

• Auction Mechanism cap on interest rate
• Varying interest rate caps on varying maturities
• Objective to avoid excessive interest rate
  fluctuations (volatility).
• Reason Small number of participants, separate
  account for reserve requirements, difficult to
  forecast liquidity.
• Disadvantage if the cap is set below market
  interest rates theres no demand for CDs.

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Amount of CDs Outstanding
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Interest Rate Trends
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Interest Rate Trends
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Interest Rate Trends