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I thank Mohammad Shadman-Valavi and Tsidi Tsikata for their encouragement; Jorge Márquez-Ruarte, Oleh Havrylyshyn, Thomas Wolf, and Zhaohui Chen for helpful comments and suggestions; and June Demafeliz for helping with the charts. All errors are my own.
BRO countries include the Baltics, Russia, and other former Soviet Union countries.
By Cagan’s (1956) classic definition, hyperinflation begins in the month in which inflation exceeds 50 percent and ends in the month in which inflation last exceeds 50 percent and is followed by 12 months of less than 50 percent inflation. While quarterly retail price inflation exceeded 150 percent during 1992–1994 in many BRO states including Azerbaijan, Belarus, Kyrgyz, Kazakhstan, Tajikistan, Turkmenistan, and Uzbekistan, only Georgia, Ukraine, and Armenia recorded inflation of such magnitude for at least 2 consecutive quarters. The Georgian hyperinflation started in September 1993 and ended in September 1994.
While wages of the budgetary institutions were set and paid in coupon, goods and services in large part of the economy were priced and paid in Russian rubles, or U.S. dollars.
According to the World Food Program, food aid shipped to Georgia (including a small amount of humanitarian assistance channeled through non-governmental organizations) amounted to the equivalent of about 342,000 and 763,290 metric tons of wheat in 1993–94 respectively. At the price of US$140 per ton, the food aid was valued near US$50 million in 1993 and over US$100 million in 1994.
The generalized consumer subsidy on bread was implicit because it did not entail direct budgetary outlays; instead the government lost revenues from the sale of food aid. In Table 3, the value of food aid and the subsidy are recorded explicitly as budgetary revenue and expenditure respectively.
NBG credit to commercial banks mostly ended in the hands of the government which was able to overdraw accounts in the banks. The former state commercial banks, major players in the banking sector, received credit from the NBG, at zero interest rate, through their correspondent accounts at the NBG.
By early 1994, gross official reserves of the NBG were less than US$100,000. The central bank sold less than US$0.3 million (on average) each month in January–September 1994.
This effectively measures
At the time, there was a debate on the choice of exchange rate regime. Advocates of a currency board arrangement argued that such a system could provide a firm exchange rate anchor to the financial system and instill credibility to the program because there would be no room for government recourse to central bank financing. The counter-argument emphasized that the conditions for a currency board were not in place. There were many uncertainties regarding the authorities’ ability to implement a tight fiscal program, the timing and availability of external financing, the likely capital inflows and real exchange rate appreciation following stabilization. Exchange rate flexibility would be needed to allow bank financing of the government operations and the government ought not to be deprived of seignorage-related revenues. In the event, the latter view prevailed.
The minimum monthly wage was increased from coupon 50,000 to coupon 1 million (equivalent to less than US$0.5 at the prevailing exchange rate) in September 1994.
In fact, the NBG did not provide credit to the commercial banks and the rest of the economy until after June 1996. The central bank had to provide financing to the government because tax revenues recovered very slowly in Georgia, increasing from 2 percent of GDP in 1993 to about 5 percent in 1996. By comparison, net tax revenues rose in Israel from an average of 22 percent of GDP in 1980–84 before stabilization to 37 percent of GDP in 1985–87. In Bolivia’s 1985 stabilization, real tax revenue increased threefold within a year and fourfold between 1984 and 1989 (see Dornbusch et al., 1990).
Including the downsizing of public employment by 30 percent in 1995, elimination of the state order system, further trade and price liberalization, and privatization.
No restrictions were placed on the amount that could be changed and commercial banks and foreign exchange bureaus were allowed to conduct foreign exchange transactions freely during the conversion period.
Endogenous tax revenue could be easily accommodated in the model, which could only reinforce the results of equation (9).
Strictly speaking, the hyperinflation ended in September 1994. In the regression of equation (3), we extended the period to September 1995 on the ground that the dual coupon-ruble economy structure was not fundamentally changed until October 1995. This extension also permits the use of more observations for estimation. Applying the Augmented Dickey-Fuller (ADF) test, the time series of π, ε, ω and DPB turn out to be stationary process in Georgia. Eq. (3) thus can be implemented using OLS to yield unbiased estimates of the coefficients and an error term with the relevant asymptotic properties.
The interest rate gap has been derived from calculating simple average interest rates in coupon and foreign currency for a diverse group of banks, based on data collected by the NBG. It should be regarded as only a rough indicator of trends.
The bread price was further increased by another 40 percent to coupon 280,000 in December 1994.
Natural gas imports, fell from 5 billion cubic meters (bcm) in 1992, to 3 bcm in 1994, and to 0.9 bcm in 1995. The government ended intergovernmental agreement on natural gas imports and its guarantees on all energy imports from June 1995, resulting in a sharp reduction in electricity generation from natural gas.