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Sketch by Giorgi Magradze/ Caucasus Business Week

Economist: Dynamics of Georgian Currency Rate through 2015

The GEL depreciation started in November 2014 and the process continued throughout 2015. In November 2014, the GEL exchange rate against USD stood at 1.75, and at 2.18 against EUR.

The GEL rate in relation to USD fell to 1.88, as of January 1, 2015, and the national currency rate against EUR constituted 2.18. The GEL devaluation peak came on the end of September, when the GEL exchange rate against USD fell to 2.44 point, according to the NBG official statistics, and one EUR was sold at 2.80 GEL. In October, the GEL rate started rising and for the last month’s it stands at around 2.40.

Thus, the GEL exchange rate against USD has fallen to 2.39 from 1.75 since November 2014, while the GEL rate against EUR has declined to 2.60 from the initial 2.18.

The National Bank Policy

Throughout the year, the National Bank of Georgia (NBG) has taken no efficient steps for stabilizing the GEL exchange rate. The NBG was rejecting the idea of tightening the monetary policy rate or/and applying to the currency reserves.

“The most popular and the most incorrect method is to demand that the Central Bank intervene and spend its reserves. This is an inefficient approach in the light of multiyear history of the world economy and the samples of our neighboring countries, including the countries that are much richer than Georgia thanks to energy-carriers exports. Having injected several billions of USD in the currency market, these countries had to devaluate the national currencies anyway. It is nonsense to spend currency reserves amid the fundamental misbalance. We could not let this happen and we have not done this”, the NBG President Giorgi Kadagidze noted in his interview with the Vlasti, the Russian-language edition.

Auction Date NBG-sold Currency (USD)
11/25/2014 40,000,000
12/2/2014 40,000,000
2/11/2015 40,000,000
2/19/2015 40,000,000
2/24/2015 40,000,000
3/19/2015 40,000,000
4/28/2015 40,000,000
9/22/2015 26,960,000
10/27/2015 20,000,000
11/25/2015 20,000,000

“Consecutive” Giorgi Kadagidze

The NBG used to resort to reciprocal criticism against the opponents. The NBG President was criticizing economic experts for creating negative expectations or accusing mystical “fundamental” problems of the GEL exchange rate devaluation. However, the audience will conclude whether the NBG President was competent and consecutive in relation to the national currency. Here we submit several statements that the NBG President made for the last year.

December 5, 2014 (1USD = 1.89 GEL):

“Both internal and external factors have driven the national currency devaluation. For the last 7 years, besides the strengthened USD rate, we witness a decline in main sources of currency inflows. At the same time, according to our estimations, this misbalance has been eradicated and this positive tendency has been already reflected on the GEL exchange rate. As to the developments of the last days, they are basically driven by panic conduct of the market players that is characteristic to the financial markets in similar situations”.

 February 7, 2015 ( 1USD=2.25 GEL):

“I reaffirm that fundamental economic factors have driven the GEL depreciation. The GEL exchange rate has declined by 30% and the 30% contraction has later also affected the imports. We expect that the imports slowdown will decrease the demand for the foreign currency and the negative effect on the national currency will be alleviated and the GEL will show stabilization and strengthening tendencies”.

 May 14, 2015 (1USD=2.36 GEL):

“The factors that were affecting the GEL exchange rate are almost disappeared and in the midterm period we do not expect the rate to depreciate in other equal conditions. As to short-term fluctuations and the existing devaluations, these processes are driven by many factors, particularly by expectations, that today are excessively negative and this factor nourishes devaluation tendencies.

 August 12, 2015 (1USD =2.30 GEL):

“Based on the collected information, we can say the existing shocks have been already reflected into the exchange rate depreciation. To put simply, the 1 billion USD losses in currency inflows have been already reflected in the reduced consumption and consequently, the in the imports declination. The imports decreased in July by about 21 % and this signifies, in all other equal conditions, we do not expect serious fluctuation of the exchange rate. However, negative expectations make the worst affect on the exchange rate.

 The GEL exchange range plunge saw its bottom on September 22, 2015 when one USD was sold at 2.4499.

The NBG has not done even a hand’s turn for the GEL exchange rate stabilization, despite expected many negative outcomes. The NBG is accountable for the inflation regulation, not for the GEL stability, the NBG was trying to escape the responsibility in this argument.

 The 40% plunge of the GEL exchange rate throughout the year was reflected into the whole economy. First, the situation worsened for the citizens who receive wages in GEL, but has taken loans in USD.

 The GEL exchange rate devaluation has increased the imports in value and prices on major part of products surged. It was easy foreseeable extreme devaluation of the national currency would hike prices on almost all products, while Georgian economy depends on the imports.

 The NBG assertions that it had no direct responsibility for the GEL exchange rate stability lost the importance, because the currency volatility resulted in inflation processes in the economy. And fixing the inflation to the target indicator is an only obligation of the NBG money-currency policy, but the central bank failed to cope with the task.  Thus, amid the increased inflation expectations, the NBG extremely tightened the monetary policy throughout 2015, while the inflation indicator was growing the whole year and for the last 5 months of the year the inflation level exceeded the NBG-determined target indicator (5%).

The annual inflation rate in November marked 6.3%, while the refinancing loan’s interest rate rose to 8% from 4.5% in 2015. The tightened monetary policy will rise loans in value and badly affect the state economy.

Thus, in 2014 the declined foreign currency inflows led the country to the national currency depreciation, while the NBG’s incorrect policy and unused monetary leverages for the GEL exchange rate stability led the country to various economic problems. Namely, the inflation rate increased, the monetary policy was tightened, currency reserves were spent and the national currency depreciated by 40%.

 Thus, Georgia is meeting the 2016 New Year with worsened macroeconomic parameters and the new president of the NBG will have to overcome all these challenges.

Merab Janiashvili