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Why Government Fails to Stabilize GEL Exchange Rate

GEL exchange rate remains the most challenging issue in Georgian society. Both ordinary citizens and experts have been actively discussing this topic. Over the past period the GEL depreciation has beaten the historical maximum.

The national currency devaluation has made negative effect on both economy and social condition of our population. As a result of the GEL exchange rate devaluation, both physical and legal bodies bear losses, who had taken debts in USD. Prices are rising on consumer products, fuel and tobacco, on almost all products. Purchasing capacity of the national currency is falling. Consumers have to pay more GEL to buy products, compared to previous years. Strengthening USD and unforeseeable economic environment have brought problems to business sector. The real estate market was also damaged.

The Caucasus Business Week (CBW) has inquired reasons behind such catastrophic downturn in the GEL exchange rate and the outcomes we should expect.  

Financier Temur Basilia talks about GEL exchange rate depreciation reasons. Unemployed budget funds make negative impact on the exchange rate volatility. According to Basilia, expenses determined by the budget law have not been thoroughly spent. Therefore, this collapse of GEL exchange rate has less relation with either social policy or elections.

The GEL exchange rate would fall in case of excessive spending of budget funds. However, the Government has not spent such funds. Moreover, even the budget law determined expenses were not fully used, Basilia said.

“Not excessive, but even the law-determined funds were not spent”, Basilia said.

As reported, a key part of unemployed budget funds is recorded for Ministry of Infrastructure. In response to the question, why the Government fails to spend money and accelerate infrastructural projects, Basilia noted that this is other problem. Anyway, the question is whether the country and its institutions are ready to use such an amount of money.

Basilia has named money-monetary policy of the National Bank of Georgia (NBG) as the second crucial reason behind the GEL exchange rate devaluation. Nothing has changed in this direction over the past years, he said.

“Regretfully, the NBG communication with our society cannot withstand criticism. NBG avoids communication with media and society, but if they do, we hear only incompetent and irresponsible explanations. I do not know what are reasons.… even in the beginner’s textbook of economy we read that a growth in money mass in turnover is one of the key reasons for the exchange rate volatility. The NBG top managers are trying to persuade us in different things. I do not know real reasons. We may suppose that in this way they try to cheat our society to hide corruption schemes regarding the so-called refinancing loans.

The matter is that hundreds of millions of GEL from NBG are mainly issued to two commercial banks for many years. This is a key reason what causes GEL exchange rate volatility”, Basilia noted.

In response to the question whether it is a right decision to extract USD from turnover for replenishing foreign currency reserves, as this move creates USD deficit on the market, Basilia explained: instead of extracting GEL mass from turnover, NBG grows GEL volume and provokes GEL depreciation.

“If GEL falls below 2.80 point, the price of 1 USD may total even 3 GEL in long-term perspective”, Nika Shengelia, analyst for FENIX 1970 company, doctor of economics noted regarding GEL exchange rate depreciation over the past period. The fact the state budget has fixed the GEL exchange rate at 2.70 point signifies that in the near future the exchange rate will be balanced on 2.80 point.

“In 2019 Government announced plans for growing pensions. About 898 000 citizens receive state allowances in the country, including 730 000 pensioners. The government has pledged to increase allowances 5 times and Government needs to mobilize about 25 million GEL additionally to this end. Therefore, nobody knows how the state budget is manipulated. Seemingly, the ruling party plans to replenish the deficit through GEL exchange rate manipulations”, Shengelia noted.

Despite elections, the GEL exchange rate fell to 2.80 point and now the Authorities artificially curb the rate. If the exchange rate falls below 2.80 point, there is theoretical chance that 1 USD total 3 GEL. However, there are no grounds for similar GEL devaluation, Shengelia noted.

The NBG regulations have frustrated the development sector. In practice, the regulator works isolated and opens way to companies affiliated with oligopolist banking system, which operate in various sectors, Shengelia said.

The country’s economic indicators are not bad, but the figures and the national currency exchange rate are different aspects. Improper, unbalanced spending of the state budget funds and invaluable economic policy is a key reason for the GEL exchange rate volatility and this process is carried out by incompetent bodies, Shengelia said.

“Unqualified staff appointed by nepotism have mainly brought these undesirable results. The results are evident for everybody”, Shengelia said.

References and explanations as if current devaluation tendencies in the neighbouring countries have depreciated the GEL exchange rate are absurd and nonsense. Domestic currencies have stabilized in all neighbouring countries since August 2018, contrary to GEL, Shengelia said.

Doctor of economics Rati Abuladze said that the currency exchange rate is an important instrument and its profile reflects economic policy of our country. Various factors make influence on it, including:

  • Political instability and inefficiency. Over the past period, the current environment during the presidential elections has made negative effect on the exchange rate. Regretfully, instead of reaping state dividends, the political spectre has not showed resources for new economic wave, potential for shaping a new political team and new political structure. As a result, public disappointment has made negative effect on the currency market too.
  • Payment balance (transactions, exports, imports). The country spends much money on imports of products, services and specialists and this is serious factor depreciating the GEL exchange rate. Every year, about 7-8 billion USD leaves the country. Budget spending on service of foreign companies and employing foreign specialists are not registered. All the above-mentioned factors reduce family incomes and make them poorer;
  • State debt. Georgia’s state debt forecast margin by the end of 2019 is fixed at 1 billion GEL, including state external debt – 15.7 billion GEL and internal debt – 4.4 billion GEL. It should be stressed that amid major state debts, the country has less changes to attract foreign capital. At the same time, amid major foreign debts and high dollarization level, the country becomes vulnerable to unexpected financial results (according to International Monetary Fund).
  • Trade conditions and competitive capacity. There is a small number of Georgian products, which are attractive and competitive on the market. Exports is a source of capital inflow. (protection of domestic products in Georgia is another problem). Furthermore, amid the current governance conditions, there is less chances for capital collection and populistic approaches prevail in the agenda.

It is noteworthy that in the initial bill submitted by the Government (about the 2019 state budget), the exchange rate was determined by 2.63 GEL. In the revised variant, the exchange rate was fixed at 2.70 GEL. At the same time, the focus is made on minimization of expected negative outcomes as a result of the currency exchange rate volatility. Therefore, the mentioned data may be considered as a real portrait of the national currency.

It should be noted that the country lacks for not qualified personnel, but the due communication that the management chains and managers should show  in relation to qualified staff. Instead of carrying our reforms and changes, the cheaper mechanism for Georgian politics is to spoil new faces and permanently use old staff.

However, both country and politics bear losses from similar approaches. And this situation destroys all directions (exchange rate, prices, state territory);

The fact is that everything has turned obsolete. Policy, management resources, offices, the workload should be essentially revised. Moreover, the new political resource outlines new and efficient horizons for Georgian or international commonwealth.

As noted, Government has submitted the 2019 budget’s revised bill. In the revised variant the GEL/USD exchange rate is fixed at 2.7 point. It is noteworthy that in the initial bill, the exchange rate was 2.63 point, in the 2018 budget – 2.5 point.

How the GEL exchange rate has changed against USD in January-October 2010:

  • January 20  — 1 USD — 2.54 GEL
  • February 20  — 1 USD — 2.46 GEL
  • March 20 — 1 USD — 2.44 GEL
  • April 20  — 1 USD — 2.43 GEL
  • May 20  — 1 USD — 2.44 GEL
  • June 20  — 1 USD — 2.45 GEL
  • July 20 — 1 USD — 2.45 GEL
  • August 20  — 1 USD — 2.57 GEL
  • September 20  — 1 USD — 2.61 GEL
  • October 20 – 1 USD — 2.7029 GEL