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Georgian National Currency in Search of a New Equilibrium

Georgian national currency continues to depreciate – a process began in mid-November and continues today – the rate of the national currency against the US  dollar  was set at  1.84.

The country’s authorities explain the decline in GELby a decrease in remittances from abroad, a decrease in exports, and some other factors.
In particular, in January-October 2014 Georgia’sforeign trade turnover amounted to  USD 9.4 billion, which is 10% more than in the same period of 2013 – exports accounted for USD 2.4 billion (a  5% growth), the import – 7 billion (+ 11%).

A  volume of investments has also reduced – for two  quarters of 2014 it amounted to USD 415, 8 million, which is 10% less than in the same period of 2013.

During 10 months of 2014, remittances from abroad amounted to  USD 1.2 billion, which is 1, 9% more than in the same period of 2013.

According to the former Vice-President of the National Bank of Georgia Merab Kakulia, imports significantly exceed exports and for this reason the negative balance of trade increased by 15% in 2014.

Apart from that, he notes that  the strengthening of the USD rate   led to a weakening of the national currencies of Georgia’s  trading partners – Russia, Ukraine, Turkey, which led to a rise in price of GELagainst the currencies of these countries, which to some extent reduced the competitiveness of the country.

“The lack of inflow of foreign currency upset the balance of the financial market that under a floating exchange rate led to a devaluation of GEL. In addition, expectations associated with excessive public spending in the period remaining until the end of the year have a negative impact  on the exchange rate – as it was  last year. In particular, in November- December 2014 about GEL 2 billion are to be  spentand this could have a significant pressure on the national currency. However, I hope that this will not happen – primary, because it is technically very difficult to do in such a short period, “-  Merab Kakuliaexplains.

According to him, the national currency has not yet reached the new equilibrium point, but close to it, respectively, the process will not last long.

“The country has a floating exchange rate, and accordingly, the National Bank will not be able to keep the rate artificially, as this could lead to a sharp reduction in foreign exchange reserves of the country. Of course, this does not mean that the National Bank should not undertake anything. The National Bank’s  interventions may facilitate GEL in finding a new equilibrium. In this regard, the National Bank has  already taken  a number of steps, “- Merab Kakulia adds.

The expert Irina Guruli belives that lari  will  not stabilize until spring.

“Last year’s scenario repeats itself  –  GEL 2 billion are to be spent  and this will put pressure on the GELexchange rate. GEL depreciation at the end of the year, as a rule, is inevitable due to the growth of public expenditure. Most likely, the trend of depreciation will eventually be about the same as last year and will reach 9-10%, “- she notes.