For my second post in what I would like to develop into a series of Q&As on central banks' transparency and communications, I chose to speak to National Bank of Georgia's Vice Governor Archil Mestvirishvili.
I first met Mr Mestvirishvili in 2014 when I led a review of the NBG's communications and organized a seminar for journalists on a visit to Tbilisi. Since then, we have occasionally bumped into each other in various central bankers' gatherings, and met once again on my follow-up visit to the NBG.
Over the past few years, the NBG was forced to weather a severe external shock and the ensuing currency weakness, in a highly dollarized economy, left the central bank vulnerable to populist attacks. The NBG's response was to dig in its heels, pursue its technocrat-oriented monetary policy, and fight to reassert its independence. Given what Georgia has been through, I myself was very much interested in finding out what Mr Mestvirishvili has to say on current transparency and communication challenges at the Tbilisi-based central bank.
As it happened, Mr Mestvirishvili answers came just as the NBG rolled out a new communications strategy.
So Mr Mestvirishvili, what is your take on my questions?
What in your personal view is a clear signal of the transparency of a central bank?
A central bank’s decisions must be clear and predictable. Economic agents should be able to understand the rationale behind them. Analysts should be able to replicate the models the CB is using and should have a clear understanding of all the exogenous assumptions that the forecast is based on. The central bank should regularly communicate with different audiences via press conferences, seminars, the internet and so on. Users should not have to spend a long time searching for data. When I was head of the macroeconomics and statistics department, I set the goal of making all the information I use for my own analyses available on the website for external users as well. I can say that 90% of the information is now publicly available on the NBG website.
How much more open could your central bank become? What are the limits on the transparency of a central bank? Where in your view does the transparency of a central bank have to end?
For a developing country in which financial education is not as good as we would like it to be, transparency has its limits. You can only be transparent to the extent that the market can digest. On the other hand, more transparency generates more credibility, which is vital for small central banks practicing inflation targeting. We are therefore gradually increasing our transparency. For example, we do not publish future interest rates at the moment, but we do try to provide some forward-looking messages about interest rates for the medium run and we will later start publishing the full interest-rate path.
What have you found to have been the most difficult moment in your central bank’s efforts in communications in recent years? What was the lesson learned?
The central bank has to make painful decisions in the short term to achieve benefits in the long term. Communicating that when the public isn’t able to foresee the long term is a difficult challenge. The Georgian banking sector is highly dollarized. Because of that, the exchange rate depreciation that resulted from the external shock created a wealth redistribution effect and the central bank's decisions were therefore moved into the political domain. Given the low financial education of the general public, there is room for populists to advocate measures that might generate some short-term improvements but will create significant long-term economic problems. As for the lesson learned, we should invest more in financial education, communicate during normal times, and be more active against dollarization, as this is not just a financial stability issue, but can also undermine the independence of the central bank.
How important is communications to your central bank’s current policy? What is the biggest challenge in your communications at the moment?
Elaborating a meaningful communication strategy/guidelines is one of our top priorities. We started regular policy communications in April.
Who are the most important stakeholders in the communications of a central bank?
The ultimate target of our communications is the general public. However, we need to split the general public into different target groups. At this stage we are focusing more on “opinion makers” such as business people, economists, experts, politicians, and journalists. Via this group we expect to influence “decision makers,” or bank clients, depositors, and borrowers. The most relevant indicator of our communication efficiency is how the degree of dollarization of the economy changes as we communicate, so the latter group is very important. The decision makers are those who decide what currency to save and borrow in. If they save and borrow in lari, it means they trust the National Bank of Georgia. Increasing larization may show us that we are on the right path.