A logo of the National Bank of Georgia (NBG) is seen at its cash center in Tbilisi. NBG file photo
A bill, that is drawing wide criticism and that would strip the Georgian National Bank (NBG) of supervisory functions of financial institutions and transfer them to a separate agency, has been passed by the Parliament with its first reading on June 27.
The bill, which was endorsed with 78 votes to 1, has faced a chorus of criticism from international financial institutions, business associations, opposition parties and a group of civil society organizations; President Giorgi Margvelashvili has indicated that he would veto the bill.
The proposal, which has yet to be approved with two other separate hearings, envisages setting up of the Financial Supervisory Agency, which will be in charge of monitoring and oversight of banking sector and other financial institutions; these functions are currently carried out by departments, which are part of NBG.
According to the bill, the planned Financial Supervisory Agency will be governed by a seven-member board. President of NBG and one more member of central bank’s board will take two seats; five other seats will be occupied by candidates nominated by the government and confirmed by the Parliament. The head of the agency will be nominated by the board members and confirmed by the parliament.
One of the main reasons of criticism of the bill is that, according to opponents, the proposal is motivated by political rather than economic reasons. The bill was initiated last month amid attacks from the GD senior politicians against NBG president Giorgi Kadagidze. The central bank chief, whose seven-year term in office will expire in February 2016, has been a frequent target of attacks from GD politicians after the national currency, lari, lost 28.4% of its value against U.S. dollar since November.
During the debates in the Parliament, co-sponsor of the bill GD MP Tamaz Mechiauri said that current board of NBG is politicized and “in order to de-politicize it we have to take political decisions.” MP Mechiauri, who chairs parliamentary committee for finances, said last month that current members of NBG board “do not reflect at all interests of those forces, which are currently in power.”
Arguing that the NBG’s current board lacks “public confidence”, he says that there is a need for such model in banking supervision, wherein the parliament and the government, which, he said, enjoy with public confidence, will also have a role.
The bill has been publicly backed by ex-PM Bidzina Ivanishvili, who said on June 4 that critics of the proposal “do not understand” the bill. Ivanishvili, who owns Tbilisi-based Cartu Bank, also claimed, the proposal would “give more independence” to the banking sector.
During the debates in the Parliament on June 26, opposition lawmakers from the UNM party were saying that the GD ruling coalition is pushing for this bill upon instructions from Ivanishvili.
“Ivanishvili demands a key to bank[ing sector]… But the problem is that after this key goes in the hands of the Georgian Dream this system will collapse… So now you are taking responsibility on a decision whether to give this key to Ivanishvili or not,” UNM MP Sergo Ratiani told parliamentary majority lawmakers during the debates on June 26.
MP from opposition Free Democrats (FD) party, Davit Onoprishvili, who chaired parliamentary committee for finances and budget before his party went into opposition, said during the same debates: “We have not seen any reasonable argument in favor of this proposal.”
“Currently we are facing many economic problems – reduced exports, slowdown of economic growth, but these risky amendments are completely irrelevant to the challenges that the country actually faces now,” FD MP Onoprishvili said. “Such an experiment can seriously harm the banking sector, as well as the stability of the financial system.”
But GD MP Nodar Ebanoidze from the Republican Party, who is another co-sponsor of the bill, said that fuss and worries over the proposal is overblown. “Our economy needs [the proposed] amendments,” he said.
In a joint letter to PM Irakli Garibashvili and Parliament Speaker Davit Usupashvili, dated with June 24, the International Monetary Fund (IMF); European Bank for Reconstruction and Development (EBRD); Asian Development Bank (ADB), and the World Bank say in “Georgia’s case, moving banking supervision out of the NBG does not seem prudent.”
“We believe that enacting the amendments as tabled in parliament would weaken the independence and quality of banking supervision in Georgia, threaten banking sector stability, and undermine prospects for sustained growth,” reads the letter. "We are concerned by the proposal to give the Parliament the power to appoint Board members of the new Banking Supervision Agency. This would undermine the checks-and-balances principle embedded in the existing appointment procedures for the NBG Board (where the President nominates a candidate and Parliament has to approve) and instead lead to politicization of banking supervision."
“Our best advice is to keep banking supervision inside the NBG,” reads the letter.
Initial draft envisaged nomination of six out of seven board members by the parliamentary factions and parliament speaker; but the revised bill, adopted by the Parliament with the first reading, entails nomination of five out of seven members by the government, who then have to be confirmed by the Parliament; two remaining seats will go to members of central bank board, one of them will be NBG’s president.
Citing the joint letter of the international financial institutions, UNM lawmakers, who were not present in the chamber during the vote, called on the parliament speaker at a parliamentary bureau meeting before the vote, to postpone the process. “We have close cooperation with these organizations on this and other issues,” Usupashvili responded.
Parliamentary committee on legal affairs concluded that some clauses of the initial bill were not fully in line of the constitution. But during the debates on June 26, chairman of the committee, MP Vakhtang Khmaladze, said that those concerns were addressed after the bill was revised. “I cannot see a contradiction with the constitution,” MP Khmaladze said on June 26.
President’s office, which has criticized the bill for lacking any reasonable “professional argument”, also notes that the way how the bill was developed violates Georgia’s commitments under the Association Agenda with the EU as the legislation related to the central bank is being amended without prior consultations with experts from the EU.
Association Agenda, which sets priorities for the period of 2014-2016 with a view to facilitate the implementation of the Association Agreement between Georgia and the EU, says that the parties will cooperate to “strengthen the independence of the National Bank of Georgia (NBG), including by reviewing the central bank legislation in line with best EU practice, including with the support of EU expertise, also from the European Central Bank (ECB).”
If vetoed the GD is well placed to override it as the ruling coalition holds 86 seats in the legislative body; at least 76 votes are needed to overturn a presidential veto.
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