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

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

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 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. 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 Open Market Operations Reserve Ratio Reserve Ratio Standing Facilities (Currently Inactive) Standing Facilities (Currently Inactive) Interbank Credit Auction 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 primary monetary policy instrument of the NBG. The open market operations are carried out through the sale of National Bank Certificates of Deposit (CDs). 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. 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. 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. 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. NBG’s Case: Why CDs? Reason: need for a sterilization tool Reason: need for a sterilization tool Lack of treasury securities Lack of treasury securities Alternative: direct deposits from commercial banks Alternative: direct deposits from commercial banks Disadvantage: deposits are not marketable Disadvantage: deposits are not marketable

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

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

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

11. Amount of CDs Outstanding

12. Interest Rate Trends