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Prohibition of Issuing USD denominated Loans will Make Credits more Expensive

Government of Georgia has recently introduced a 10-clause plan and dedollarization policy is one of the key directions. Both government and National Bank of Georgia (NBG) declare that dollarization level is very high in the country.

According to October 2016 indicators, deposits dollarization indicator in October rose by 0.5% and made up 69.7%. Because of high dollarization, the national currency devaluation has badly affected Georgian citizens, because a major part of borrowers have taken USD-denominated loans, while they receive wages in GEL.

According to the Government plan, in January-February 2017, USD-denominated mortgage loans issued before January 1, 2015, will be converted due to the then exchange rate minus 20 points, of which 20 Tetri will be subsidized from the state budget. At the same time, starting January 1, 2017 loans of about 100 000 GEL will be issued only in GEL, while the top margin will rise to 200 000 starting 2018. Furthermore, price of any product or service must be published in GEL starting 2018.

A major part of economists backs the government’s initiative for reducing dollarization level, however, the same majority does not agree to implement the process under strict regulations. On the one hand, it is very good that the Authorities are trying to resolve this problem, but another issue is how it will manage to attain this goal without damaging the economy.

In relation to the Government’s dedollarization plans, subsidization issue should be outlined first of all. It is unjust and populist decision to subsidize every 20 Tetri in 100 000 Gel loans for 33 000 clients. Moreover, prohibition of issuing loans of about 100 000 GEL in USD will make credits more expensive. This tendency will shrink crediting volume and decelerate economic growth paces. Today interest rates on USD-denominated loans is lower than on GEL-denominated loans, because commercial banks are able to draw foreign currency from cheap source, while GEL are received from only domestic market and NBG. Since Georgian citizens prefer to make savings in foreign currency, it is difficult to draw GEL-denominated long-term financial resources. Therefore, if commercial banks are banned to issue USD-denominated loans of about 200 000 GEL, drawing GEL resources in exchange will be much more expensive and these resources will be lent at expensive rates. The NBG president has responded to objectors of dedollarization policy on his own Facebook page. Koba Gvenetadze referred to research by International Monetary Fund (IMF) that proves that exchange rate flexibility is a key precondition for quick dedollarization of loans.

“In the research process we explored experience of 33 developing countries in 1997-2015. Moreover, under the research, the more flexible the exchange rate, the faster dedollarization process proceeds. The authors refer to the sample of Peru, where dedollarization process was accelerated at high paces after 2014, when the exchange rate flexibility increased in the country and adequate macroprudential measures were introduced. Currently dollarization level in Peru makes up only 29%”, Koba Gvenetadze said.

At the end of 1980s and at the beginning of 1990s, hyperinflation was recorded in Peru. As a result, dollarization indicator rose to 90%. After that Peru started serious macroeconomic reforms. New budget law enabled to maintain deficit and loans at low level. At the same time, inflation targeting regime that was introduced in 2002 strengthened trust  towards the domestic currency. As a result, inflation indicator is  2¾ percent on average since 2002 and this is one of the lowest indicators in Latin America. At the same time, Peru Government has carried out additional measures and introduced stricter requirements for issuing currency credits and at the same time, offered repo operations to commercial banks and enabled them to issue credits in national currency.

It should be noted that the policy of dedollarization or so-called Larization was announced by National Bank as a priority direction in 2010. Starting 2010 deposits dollarization was declining at low rates. For example, in 2010 deposits dollarization was 79%, while in June 2016 deposits dollarization made up 65%.

As to dollarization coefficient in total loans, the indicator was 73.7% in 2010, while in June 2016 the ratio in USD-denominated loans marked 67%. It is worth noting before 2014 dollarization ratio was declining. At the same time, at the beginning of 2016, when GEL started quick depreciation, in first four months the dollarization level rose to 70% and then started declining again.

Dollarization indicator was declining at comparatively faster rates in individual loans – in 2010 dollarization coefficient was about 72%, while in June 2016 this indicator declined to about 56%.

One indirect instrument has been already activated for dollarization reduction. Namely, under the NBG decision, starting June 16 minimum reserve requirement norm made up 7% (instead of 10%) on GEL-denominated resources with about 1-year maturity period. In case of foreign currency denominated resources, the reserve norm rose to 20% from 15%. At the same time, obligatory reserve norms on foreign currency denominated resources with 1 to 2 year maturity period rose to 10% from 5%.

It is interesting that in 2003-2004 obligatory reserve norm on both GEL and USD denominated resources was equal almost and ranged from 13% to 14%. In the following years, the reservation norm in GEL declined, but the norm remained at 13% on USD-denominated resources. In 2007-2008 reserve norms changed several times, but reservation norms in GEL and USD was equal. Starting 2010 NBG increased reserve norms to 10% from 5% and later to 15%. And starting June 16 commercial banks have to reserve attracted resources by 20%.

The fact is that dedollarization remains one of the key challenges of our economy and it requires long-term process. International experience suggests  that many countries have overcome dollarization problems thanks to correct policy in 10-15 years. Therefore it is useless to expect quick breakthrough in this direction in Georgia. One thing is evident: prohibition of issuing USD-denominated loans in about 100-200 thousand GEL will reduce crediting volume and increase interest rates on loans and this trend will decelerate economic growth.

We also remind you that in January to October 2016 Georgian economic growth made up 2.6%, while the 2017 budget plans 4% GDP upturn. To put simply, low economic growth was recorded over the past years and further deceleration will bring nothing good.

By Merab Janiashvili
Economic Analyst
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