Home / Economy / Dollarization Index Grows from 10% to 70%
Dollarization

Dollarization Index Grows from 10% to 70%

The GEL exchange rate is decreasing again. The devaluation rates are lower compared to the end of 2014 and 2015, but the Georgian national currency cannot maintain its stability nevertheless.

As a result, the public’s trust in the national currency has fallen. The high index of dollarization in the banking sector only confirms this. The dollarization index currently makes up 69% (January to November 2015). This means that almost ¾ part of deposits placed in commercial banks are denominated in foreign currencies.

According to the National Bank of Georgia (NBG), the volume of deposits in the banking sector accounts for 15.182 billion GEL in the January to November period. Including, GEL denominated deposits marked 4.605 billion GEL, that is 30.4% of total deposits, while foreign currency denominated loans amounted to 10.577 billion (69.6%).

Average interest rate on GEL-denominated deposits is 8.4%, while the yield on foreign currency denominated loans makes up 3.8% as of December 2015. Nevertheless, Georgian citizens and the business sector prefer to save deposits in foreign currency.

The high dollarization coefficient in the Georgian bank sector is not a new tendency. This problem has existed for many years, but no real decisions are taken to improve the situation, despite a lot of discussions.

In 2010, the NBG new president Giorgi Kadagidze announced that the national bank would focus on lowering the dollarization coefficient. Kadagidze has even established a new term – Larization meaning a development of the national currency money market and contraction in the dollarization ratio.

Kadagidze asserted 6 years ago that the Larization would protect the population and the business from currency risks:

“Larization is our major priority. This means deposits and loans should be converted into GEL. The companies that receive revenues in GEL should have an access to GEL denominated loans to be protected from currency risks,” the NBG President noted in that period.

To lower the dollarization coefficient, even the European Bank for Reconstruction and Development (EBRD), decided to issue GEL denominated credits to Georgia. The European Bank had backed the initiative for issuing GEL-denominated credits to Georgia previously too. But the new program of the so-called Larization implies new scales. The EBRD’s chief banker in Georgia Irakli Mekvabishvili said.

Besides commercial banks, microfinance organizations, insurance, and private companies will participate in the larization program. They will be able to receive long-term credits in GEL from EBRD, Mekvabishvili added then.

To put simply, the NBG President announced the dollarization coefficient contraction as a main priority for 2010. He was talking about this priority in various international organizations and media outlets.

Six years have passed since then. Giorgi Kadagidze will complete his term on the NBG president’s position in February, while the dollarization coefficient remains the sharpest problem in the Georgian economy. Last period the problem was deepened because of the GEL exchange rate devaluation.

It should be also noted in spring 2010, when the NBG President announced the Larization plans, the dollarization coefficient in the Georgian bank sector was 68%-69%. The ratio increased to 70% by the end of 2010. After slight changes, the ratio even fell to 60% by autumn 2014, but the GEL exchange rate’s extreme depreciation increased the dollarization ratio again and the figure reached 69% by the end of 2015.

In 2010, economic experts and the bank sector specialists urged Giorgi Kadagidze that the GEL exchange rate stability was a main precondition for reduction in dollarization coefficient. All leverages are useless without the national currency stability. The past period proves this consideration, as six years have passed since the announced Larization program and the dollarization coefficient remains the same in Georgia.

To be simply, the efficiency of one of the main priorities of the NBG is equal to zero.

Today economic experts make almost the same appraisals and recommendations as six years ago, when the NBG announced plans for reducing the Dollarization coefficient.

In her interview with the Rezonansi newspaper Doctor in Economics and the bank sector specialist Lia Eliava noted that in 2014 the dollarization coefficient was 60% before the currency crisis.

“Every year the international monetary fund (IMF) mission arrives in Georgia and makes a report, where it instructs the NBG to lower the dollarization coefficient in the economy. These reports also prove that the NBG promises to fulfill these instructions. This continues for 7 years, but the NBG cannot or does not fulfill them.

The dollarization process is a negative tendency, because the state economy and GEL become extremely sensitive to external shocks and they largely depend on the economic developments in other countries. In practice, the GEL is not a valuable currency, because it lacks for one of the major functions of a currency – the function of saving. Our people prefer to save money in foreign currencies.

The high dollarization coefficient is one of the main ballasts in the state economy. This index has surged by 10% in a year and this is a big leap backward. The GEL has lost creditworthiness”, Lia Eliava noted. The bank sector expert Gocha Tutberidze also considers the NBG has failed to  reduce the dollarization coefficient in the economy.

“The GEL devaluation and excessive ratio of the USD-denominated loans make people change their priorities and make more accents on foreign currency. This factor grows the dollarization coefficient in both loans and deposits portfolios. The dollarization coefficient cannot be lowered amid the currency volatility period. The GEL exchange rate should be stabilized and the NBG should take due steps in this respect”, Tutberidze said.

„Such a high dollarization coefficient signifies that the National Bank is inefficient. I cannot understand who owns our National Bank – is it the extension of the US Federal System or it is an independent money-credit policymaker of Georgia? The NBG is directly responsible for reducing the dollarization coefficient. And what does it make for this? Nothing”, economic expert Vazha Kapanadze noted.

Thus, the Larization plans outlined by the NBG President Giorgi Kadagidze six years ago have failed. And this outcome was foreseeable because of the GEL exchange rate volatility for the past years.

In November 2008, the GEL exchange rate against USD slipped by 16% to 1.65 point from 1.42. In 2010 the national currency depreciated to 1.88 from 1.69, but later strengthened again to 1.63 point.

In 2014-2015 the GEL depreciated by about 40% to 2.43 point from 1.75; The January of 2016 – the Georgian National Currency Keeps Sinking…

By Merab Janiashvili
Economic Analyst
More by By Merab Janiashvili