The National Bank of modern Georgia was established in 1991 after the dissolution of the Soviet Union (the USSR), when in accordance with the Resolution of the Supreme Council of Georgia all organizations that were a part of the Soviet credit system within the territory of the Republic of Georgia - including the State Bank, on the basis of which the National Bank of Georgia was established - were declared the property of Georgia.
The banking legislation of the period had many defects. First of all, the independence of the National Bank was not distinctly expressed, which led to undesirable interference of the executive and legislative authorities in its business.
Furthermore, its principal functions were not explicitly formulated. In particular, the central bank was simultaneously tasked with carrying out anti-inflation policy, stimulating "balanced development of economics" and activation of economy. All these issues were quite ill-defined, contradictory and partially beyond its scope, which, of course, hindered the implementation of effective policy.
Under the applicable laws, a three-tier banking system was established in Georgia, which was substantially impeding the development thereof. Against the background of liberal approaches the number of banking and other type credit institutions increased. In the virtual absence of regulation, many of them could not perform elementary functions, naturally posing a danger to the country's economic stability. In addition, the National Bank carried out extensive monetary expansion within the scope of liberal monetary and credit policy, which caused hyperinflation in the country.
Although the law never allowed the National Bank to provide direct financing of the budget deficit, the credit expansion was carried out through crediting of commercial banks, which lead to the same devastating results.
The independence of the National Bank was also restricted because its managing committee used to be appointed for a five year term, which made the National Bank unprotected from the changes of political climate. There used to be times when there was no legislative authority in the country and important decisions regarding monetary regulations were made by the head of the executive authority.
Another factor affecting the bank's independence was its inability to emit money before April 1993. Georgia was part of the ruble zone, which made it dependent on the Russian government. The latter successfully made use of this dependence as a means of political and economic pressure. Given all this, it was important to put the coupon - a temporary monetary unit - into circulation on April 3, 1993, soon after Russia stopped providing Georgia with rubles. The coupon had to undergo all the difficulties of the transitional period until real national currency was issued. After the coupon was put into circulation, already difficult political and economic situation in the country became more complicated yet because unreasonably liberal monetary and credit policy led to the coupon's disastrous depreciation.
The bank's operations were further complicated by its inability to carry out currency transactions - a fact explained by its lack of currency reserves. Although by that time the government had already mandated the sale of export earnings to the state, this measure failed to fill up the reserves at the initial stage. From June 1993, a new rule guiding the formation of a state currency fund came into force, according to which the National Bank would keep 10 from 32 percent of export earnings subjected to the compulsory selling to the state. The following year, the whole amount from this measure was used to fill up the National Bank's reserves.
Starting from 1992, with active assistance of international organizations, the work commenced in Georgia to create a legislative base necessary for modern monetary-credit and banking system. It is remarkable the Decree of the Head of State from November 29, 1993 "On Certain Emergency Measures of State Monetary-Credit Regulation of the Republic of Georgia", where recommendations of international experts and proposals of the new management of the National Bank were taken into consideration.
From May 25, 1994, commercial banks acting in Georgia under a special decree of the National Bank were assigned new norms of statutory capital, which led to a gradual increase in the capitalization of the banking system.
The August 12, 1994 Decree of the Head of State, "On the Development of Banking System in Georgia", established a two-tier banking system. This same document was also essential as it meant to shift accounts of the Ministry of Finance to the National Bank to better regulate cash delivery and to free the National Bank from the function of providing direct settlement with clients and transfer such duty to commercial banks.
Currently, the status of the National Bank of Georgia is determined by the Constitution of the country. According to Article 95 of the Constitution, the National Bank is independent in its activities. Rights and obligations, business manner and guarantee of independence of the National Bank shall be specified under the Organic Law on the NBG, adopted on June 23, 1995.
The Organic Law enables the Central Bank to be independent when carrying out its monetary and foreign exchange policies.
The National Bank is free from any interference by the executive authority in its business. It is accountable to the legislative authority - the Parliament of Georgia, which annually approves "Principal Trends of Monetary and Foreign Exchange Policy", providing some basic quantitative parameters for the Bank's activities and enumerating strategic measures to be taken within the year to ensure the development of the monetary and country's balance of payments systems and the existence of prudential regulation.