Georgian national currency depreciation may cure economy
05 December, 2013
 Georgian national currency depreciation may cure economy
The recent depreciation trend of the Georgian national currency, the Lari, affects the purchasing power of ordinary citizens, but it may cure the shrinking Georgian economy. Lately the Lari depreciated against the US dollar at the fastest rate since May 2011. It began the year at GEL 1.65 against USD 1; now the dollar costs GEL 1.69, a loss of 2.4%. The major drop – of 1.6% - came this past November, when during the month the Lari fell from
GEL 1.6690 to GEL 1.6967 against the USD.
This trend makes Georgian consumers nervous, since a price hike is impending. The opposition party and some economic analysts suggest that the sudden depreciation curve was artificially induced by the Georgian government economic team to avoid the imminent deficit in the state budget. Some economists predicted that by the end of October the state budget might face a shortfall ranging from GEL 500 million to GEL1 billion.
Another group of financial market analysts, however, believe the previous government propped up the Lari artificially, which had a negative impact on the economy - so it is high time to let the currency float free, even if it loses value.
“The Lari was held high artificially for years; it is the second highest currency in the region, after the Azeri one. All sensible countries except Georgia let their currencies devaluate to combat the crisis of 2008,” said Ditrikh Muller, a co-founder of Georgian Investment Group+. “The economic slowdown now underway is a result of deflation in the country, and to bottom out the deflation the depreciation of the Lari is necessary: it will give an impetus to inflation, economic activity, job creation and export, as the price in national currency will reduce. And of course the state budget will witness higher revenues as a result.”
Finance Minister Nodar Khaduri and the National Bank of Georgia both indicated that the recent devaluation of the Georgian national currency is a normal seasonal fluctuation, and the situation is under control. The NBG also ruled out speculations on account of artificial manipulation of the Lari as technically impossible.
Khaduri also denied manipulation of currency depreciation to fulfill the state budget. “The state budget [of 2013] was calculated on the exchange rate of USD 1 against GEL 1.7, by the way,” he said in an interview with Palitra TV, adding that there are no grounds for panic. The NBG currency reserves increased significantly, and it can interfere if necessary, he said, and conceded that exports are also increasing this year.
Lia Eliava, a financial market analyst, agrees that the current drop in the Lari’s value is insignificant, in fact, and a very timely remedy, but it also is obviously handy for the Finance Ministry that planned the state budget based on 4% inflation this year, whereas the country has experienced deflation since 2012. The next year’s budget is also planned on inflation, targeted at 5%. To this end, depreciation of the Lari is very timely. Otherwise, the next budget may also face a deficit.
“Very likely NBG is trying to get inflation by devaluation of the Lari,” Eliava said. “The point is that it immediately sends prices high and boosts inflation because Georgian businessmen who do not trust Lari much not only increase prices on imported products but also build high profit margins into the price to insure possible currency risks.” She approves of the Lari devaluation as a good move to revive the faltering national economy but fears that Lari depreciation alone is not sufficient, and will be burdensome to Georgian consumers’ pocketbooks.
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