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Home / Economy / What Drives LARI – National Bank Changes 3-Year Position on Refinancing Loans’ Impact on GEL Exchange Rate
Georgian Lari

What Drives LARI – National Bank Changes 3-Year Position on Refinancing Loans’ Impact on GEL Exchange Rate

Starting August 21, GEL exchange rate has been declining. 1 USD was equal to 2.38 GEL and 1 EUR was equal to 2.80 GEL on August 21 . As of September 6, the exchange rates have dropped to 2.49 GEL and 2.96 EUR respectively.

National Bank has not carried out currency interventions and has not even mentioned  the national currency.  Over the past years, the NBG has been carrying out  policy without mentioning GEL. Maybe, they think the problem will be resolved in itself by ignoring it and Georgian national currency will maintain stability in itself. Regretfully, this is not realistic and the past two weeks have proved this.

Now we should analyze the indicators that could cause GEL exchange rate changes. Naturally, current situation in our external partner countries is very interesting. Currencies of our partner countries have strengthened from August 21 to September 6. For example, EUR strengthened against USD to 0.83 point from 0.84 point. Russian Ruble against USD rrose from 59.1 point to 57.3 point. Azerbaijani Manat slightly rose  against USD from 1.699 to 1.698 point. Armenian Dram also insignificantly strengthened from 478.54 point to 478.19 point, while Turkish Lira strengthened to 3.44 point from 3.51 point. Only Ukrainian Hryvnia has declined slightly against USD from 25.5 point to 25.97 point.

Currency exchanges of our neighbors and partner countries clearly show that it is not right to blame external factors for 2-week depreciation of GEL.

Current account deficit plays considerable role in GEL exchange rate volatility. According to the first quarter of 2017 indicators, current account deficit constituted 377mln USD, up 38.6mln USD (+9.3%) year on year. Regretfully, the second quarter indicators are not attainable yet (they have not been published yet). As to external trade, in January-July Georgia’s negative trade balance made up 2.7819bln USD, up 50mln GEL year on year and this is the best indicator over the past 6 months, excluding the year of 2016.

At the same time, the current year is recording a growth in money transfers to Georgia. In January-July 2017, money transfers to Georgia constituted 749.89mln USD, up 123.8mln as compared to the same period of 2016 and up 120mln GEL as compared to 2015.

It should be also noted that in July and August Georgia recorded a major inflow of visitors: 982 487 ones in July and 1 080 449 ones in August, up 232 068 visitors year on year.

Only contraction was recorded in an inflow of foreign direct investments. According to preliminary indicators, FDI inflows in the second quarter marked 346.6mln USD, down 14.3% year on year. FDI inflows in the first half of 2017 marked 751mln USD, down 5.5% year on year.

In short, the country records an advancement in all components of USD inflow, excluding FDI, where contraction recorded 23.8mln USD and this is not a significant reduction.

Consequently, these processes were to strengthen GEL exchange rate. In summer period the national currency marked revaluation signs, but NBG carried out currency interventions and extracted 110mln USD from turnover and halted the GEL strengthening process in this way.

As to refinancing loans, the last month has recorded declination signs. As of June 15 NBG had issued 1.35bln GEL refinancing loan to commercial banks and since then the crediting volume showed contraction trend and on September 7 the volume of refinancing loans declined by 520mln GEL to 830mln GEL. However, at the same time, the Government started applying a new instrument in June 2017 and the Finance Ministry treasury office placed 500mln GEL on 3-month deposits at commercial banks. Opposition MPs point to this factor as a key source of GEL exchange rate depreciation.

«The parliament meeting yesterday started by speculations. Nobody expected anything else from United National Movement members, but our population deserves to have comprehensive information about money placed by State Treasury at commercial banks. Today money market has been arranged it the form of a shared vessel and the refinancing loans volume shrank in the same amount of money that was placed by State Treasury at commercial banks. Consequently, it had not impact on whole money supply», Dimitri Kumsishvili said in response.

NBG vice president Archil Mestvirishvili has commented on State Treasury money management operations. The mechanism has been agreed with NBG and is implemented under NBG coordination. It has been developed by  World Bank and IMF. «These operations does not grow money supply, because the demand for NBG refinancing loans is declining in the same amount. These are similar products and they balance each other», Mestvirishvili noted.

It is paradox that over the past 3 years representatives of Government and NBG have asserted that refinancing loans could not affect GEL exchange rate, but now they assert the opposite considerations without feeling awkward. They contradict their own positions. Regretfully, NBG changes its position in so quickly. GEL exchange rate has depreciated, not because of external factors. This happened because of expectations or Finance Ministry’s new instrument, but this is less important for a final outcome.

The fact is that NBG has failed to manage these processes in cooperation with Ministry of Finances and now their statements aim at justification of this or that event and they abstain from naming real reasons.

By Merab Janiashvili
Economic Analyst
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