July 2, 2019 / 3:03 PM / 17 days ago

UPDATE 1-Georgian economy likely to feel effects of Russian flight ban, central banker says

(Adds more info, background)

By Margarita Antidze

TBILISI, July 2 (Reuters) - Georgia’s gross domestic product might be reduced by more than 1% this year this year because of a dispute with neighbouring Russia, the head of Georgia’s central bank said.

Some $200 million to $300 million could be cut from GDP, Koba Gvenetadze told Reuters in an interview, which would be a loss of as much as 1.8%.

The economic damage would be caused at least partly by a flight ban imposed by Russia amid protests in Georgia. Those protests broke out on June 20 after Russian lawmaker Sergei Gavrilov, invited to Georgia by pro-government deputies, addressed the chamber in Russian from the speaker’s chair.

His gesture unleashed simmering resentment among many Georgians, who are angry they have to maintain friendly ties with Moscow even though Russia briefly invaded their country in 2008 and still backs two breakaway regions.

The protests have quickly developed into a double crisis, pitting Moscow against Tbilisi and the protesters in Georgia against their own government. The protesters say demonstrations will continue until Interior Minister Giorgi Gakharia resigns.

In response, Russia suspended flights to Georgia starting July 8 and said it was tightening controls on Georgian wine imports.

The effect on the economy will complicate the central bank’s response to acceleration inflation, which looks likely to exceed its target of 3% this year. Gvenetadze said the central bank would use a “careful approach” in its monetary policy so as not to further harm economic growth.

Consumer prices in Georgia rose 0.5 percent month-on-month in May after climbing 0.2 percent in April. Annual inflation in May stood at 4.7 percent, up from 4.1 percent in the preceding month.

“I think that annual inflation will be above the target by the end of the year,” Gvenetadze said. “If we try to reduce inflation by monetary policy ... that will result in penalising the economy and reducing the growth ... our approach will be very careful.”

The central bank kept its refinancing rate at 6.50% on June 12 after cutting it to 6.75% in January and to 6.50% in March. The next monetary policy committee meeting is on July 24.

Gvenetadze said that he believed that current account would be improved this year with a deficit being less than 7%, while in reached 7.7% in 2018.

“Even in the case, if we lose $200 to $300 million, we still think that by the end of the year current account deficit will still be improved compared with last year, which means that there should be less pressure on the exchange rate,” he said.

He said it was difficult to say whether Georgia would be able to fulfil the economic growth projection of 4.9% for this year.

Fitch said on Monday that Russia’s flight ban would weigh on Georgia’s growth and current account through its impact on tourism. Georgia got around $3 billion in revenues from tourism in 2018. (Editing by Larry King)

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