GEL Exchange Rate, Tightened Monetary Policy and Currency Interventions

Tightened monetary policy, currency interventions and lowered reserve requirements; does the National Bank’s policy genuinely work in relation to the GEL, and what is the problem with the national currency?

Koba Gvenetadze, president of the National Bank of Georgia (NBG), has talked about inflation, GEL and NBG policy details for the BusinessPartner TV program. 

The government and the central bank coordinate their efforts, and this format will continue, Gvenetadze said. 

“There were certain statements regarding our measures. Naturally, we coordinate our steps with the government. In this case, we need more coordination and we will continue this format”, Gvenetadze said. 

There is no ground for inflation panic in the country, because the NBG has consecutively applied all mechanisms to alleviate inflation pressure and the inflation will definitely decline, he said. 

A greater than anticipated depreciation of the national currency put  pressure on inflation after Russia set flight ban on Georgia in June 2019, Gvenetadze specified. 

“We know that in the winter,the Russian flight ban raised expectations for such a slowdown. The mechanism of public expectations play an essential role in the floating regime. Later, tourist inflows declined in reality: by 13% in July, and by 11% in August. If we analyze the indicators for late August, the growth in incomes was around 0%, despite the fact that the number of visitors was growing. When we detected this trend, we clearly declared that such a depreciation of the effective exchange rate (of the national currency) could have a crucial impact on inflation. Therefore, this was a very important factor (currency exchange fluctuation). There was a period when the currency exchange devaluation had not depreciated, but now this trend is strengthening, and it is bringing real problems”, Gvenetadze said. 

However, the NBG President believes that there are no grounds for panic, because the NBG holds enough mechanisms to curb inflation. The Central Bank is employing these mechanisms and consequently, inflation will definitely decline, he assured.

“We use all the mechanisms that the National Bank has. We have used the refinancing rate, and raised it by 0.5%, twice. The last meeting was held ahead of schedule. We sold currency reserves, twice, and several days ago, we lowered the foreign currency reserve requirements by 5%. In this case, the banking sector is allowed to supply more foreign currency liquid resources to the economy.  As a consequence, we used all the mechanisms that were available to alleviate inflationary pressures coming from the effective exchange rate’s devaluation”, Gvenetadze said. 

As for the considerations that in 2018 the NBG erroneously increased the foreign currency reserve requirement for commercial banks, Gvenetadze noted that this decision in 2018 was the correct step, as well as another decision in 2019. 

“In due time, we tightened the rate to lower financial stability risks in the country that come from the high level of dollarization. Therefore, without foreign currency reserves, today, we would not be able to ensure foreign currency supply, when we sold foreign currency on August 1, as well as last week”, Gvenetadze said. 

The so-called targeting regime of the target inflation indicator allows that the NBG employ convenient  monetary policy instruments, and lower or increase it in compliance with the existing risks. External shocks may appear at any moment, but the country must be able to withstand it, Gvenetadze noted. 

‘We control these mechanisms. We cannot forecast shocks, but we have all the mechanisms to neutralize these shocks. There are no grounds for panic. We take active steps. We take coordinated steps with the government because of financial stability issues, economic issues, inflation issues should be resolved jointly, and I’m sure that the correct macroeconomic approaches will bring efficient results”, Gvenetadze said. 

Despite the fact that the monetary policy rate was tightened twice, and currency interventions were carried out twice on the market, the inflationary pressure has not been removed, and the newest statistics show that the prices on certain products have increased in two-digit figures. In this respect, Gvenetadze explains that the Central Bank uses all monetary policy instruments and inflation will definitely decline. However, Gvenetadze noted that citizens ask whether the NBG has deliberately refused to use currency reserves, and this is not true. 

“The sale of currency reserves was not delayed. There were some who believed that the NBG did not sell reserves, but this is false information. Reserves are sold at the appropriate time, and similar decisions should bring desirable effects. Our policy serves this objective: to make interventions at the appropriate time. Interventions must be efficient, otherwise the objective will not be achieved, and reserves may be spent in vain. Therefore, when making an analysis, we precisely determine the complex approaches and other measures that will work in specific situations. In this case, initially, we carried out interventions, and then tightened the monetary policy rate. Now, we are reducing the reserve requirements, and we are using all these mechanisms”, the NBG President noted. 

Reduction in foreign currency reserve requirements will mainly refer to corporate loans; foreign currency denominated retail loans are not issued up to 200,000 GEL, and this mechanism will not change, Koba Gvenetadze said. 

Based on reduction in foreign current reserve requirement, the question is whether this is a deviation from the Larization policy, but this is not accurate. 

“Another question is whether this is a deviation from the Larization strategy that was coordinated by the NBG with the government of Georgia. This is not a deviation from Larization.  When talking about Larization and vulnerability coming from foreign currency denominated loans, we should not forget that these are primarily physical bodies who cannot resolve these problems. And commercial banks are banned from issuing foreign currency denominated loans of up to 200,000 GEL. This mechanism remains unchanged. As for corporate loans, they can manage currency risks better. Therefore, even if the Larization process is delayed, this process will run at the expense of major corporate loans that can better manage the risks. At the same time, Larization is a long-term project; it may last 15-20 years, and this process does not imply annulling foreign currency denominated loans. The larization project has brought effective results, and the dollarization of physical loans has declined by 16% over the past few years”, Koba Gvenetadze said.