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The Coming Collapse of the Georgian Economy
04 June, 2015
There is great concern in Georgia about the dropping value of the lari and the rising cost of imports that it entails. Both sides of the political map are in spasms of blame over the issue and both are wrong. The former leadership is saying this is caused by the current leadership in some way; however, they aren’t very specific because they are wrong. The current leadership blames this on the National Bank, and
they are also wrong. In fact, the real reasons are many in number: an unusually strong U.S. dollar, the combination of Russia’s invasion of Ukraine, the collapse of oil and gas prices and the enormous drop in the value of the ruble. Every country in the region that has a financial relationship with Russia has experienced this, and all of them had it worse, some much worse than Georgia. So how could it be caused by the current leadership or the National Bank?
The current political leadership has made two main points in its criticism. The first one alleges that the current situation was caused by some kind of mysterious financial manipulations by commercial banks. This is not true, but to those who don’t know much about macroeconomics, it may sound somehow plausible. It’s not. Their second accusation is against the National Bank’s Chair for not draining Georgia’s foreign currency reserves to support the lari. This could have been done, and it would have supported the lari for a few days or weeks, but eventually the exchange rate would have settled in the same place it is now. But then Georgia would have no foreign currency reserves and would need to borrow to get them, so interest rates would go up.
Georgia’s commercial banks and banking system overall is incredibly successful, the best in the region by far. They are independent, reliable and make firm foundation for the economy. Although both Shevardnadze and Misha controlled many parts of the state that should have been independent, the National Bank always stayed on its own, as it should be. The two previous governments allowed this because they knew if they pushed too hard, they risked economic collapse. The National Bank did such a good job of regulating banks that two of them are even listed on the London Stock Exchange, which requires the highest standards of management and transparency. The real reason behind the intent to take supervisory power away from the National Bank lies in a desire to establish political control over the banks. Misha tried to do the same thing after the 2008 war. It ended in a dangerous failure, so supervision went back to the National Bank within a year. There are some countries that keep banking supervision separate from their national banks but thjeir numbers are few, and most prefer to leave supervision to the bank.
The term of the current Chair of the National Bank expires in a few months, and the situation is getting quite tense. The other way the independence of the National Bank could be compromised would be if a sycophant good at following orders was appointed. This is just as dangerous. It would cause the flight of international investment and an increase in interest rates. Companies would begin firing employees, no longer able to bear the financial burden. Strongest independent economy in the region, that has stayed strong even in this regional crisis, would collapse.
Georgia is well integrated with the global economy and has all the benefits of that, but also all the vulnerabilities, and they do not stem from speculation - a word usually used by those who don’t know much about macroeconomics. Georgia is competing against other countries all over the world for investment. And people who watch over chunks of capital are permanently nervous. They see actions that they are think are panicky and politically motivated, rather than calm and based on common understanding of economics, and they pull their money out. It’s that simple.
If that happens, then Georgia will have much bigger problems than a new lari-dollar exchange rate. When it comes to pillars holding the economy up, the Georgian leadership should not try to fix what isn’t broken. Big but delicate things like economies are easy to break but take a long time to build. If you worry about this, then contact some politicians, particularly members of the parliament, and let them know what you are thinking.

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