Georgian national currency vulnerable
16 January, 2014
Lari continues its movement down the depreciation path. Economists are concerned over possible speculation and an inadequate monetary policy.Lately the Lari’s depreciation against the dollar has doubled in pace. During 2013 the average was 2.4%. It started the year at GEL 1.65 against USD 1. In mid-December it was GEL 1.69. However, by the end of December depreciation doubled to 4.6%, and the downward trend exceeded 5.4% by mid-January2014, when Lari fell to GEL 1.75.
Why? The opposition and some
economists suggest that the sudden depreciation was artificially induced by the government economic team in order to avoid the imminent deficit in the state budget, and some economists predict a budgetary shortfall of GEL 500 million to GEL1 billion.
Others think the depreciation was due to the unprecedented high capital outflow in the third quarter of 2013,when USD 312 million left Georgia, while only USD 239 million flowed in. Some suspect speculation, or put blame on faulty monetary policy.
Both Finance Minister Nodar Khaduri and National Bank of Georgia claim that the devaluation is a normal seasonal fluctuation and the situation is under control. The NBG also ruled out speculation and artificial manipulation of the Lari as technically impossible.
Giorgi Kadagidze, Governor of the NBG, cites other factors: the reduced monetary policy rate (to fight deflation last year the NBG reduced its rate by 150 basis points), increased budgetary expenses in the last quarter of 2013 (during 9 months the state budget had a surplus, since infrastructure projects were halted), and a 4% drop in imports over ten months. He said the currency fluctuation is normal since Georgia has a floating currency regime, and promised the trend would not be harmful to the economy.
However, as the depreciation continued, the private sector became nervous, and Kadagidze had to meet with businesspeople on 10 January to explain monetary policy. He promised that if the currency devaluation grows into inflation, NBG will undertake a stronger monetary policy. Kadagidze mentioned earlier that USD 3 billion of international currency reserves of Georgia are at the disposal of NBG, enabling it to intervene if necessary.
Lia Eliava, a financial market analyst, argues that the ongoing currency depreciation is a result of policy that makes Lari vulnerable to speculative manipulations. According to her, the currency rate is not floating, but in fact strongly regulated by NBG, which regularly intervenes in the currency market to keep Lari’s value high. In just two months NBG spent USD 300 million or 10% of Georgia’s international currency reserves to maintain the Lari’s value.
“The floating rate is affordable only to countries with strong industrial development, where the currency rate is not tied to the price level or any other currency. Such currency is responsive to speculative deals and recovers after fluctuations,” Eliava explained. She said Georgian currency is tied to prices because 80% of Georgia lives on imports. On the other hand, Lari is a very strongly regulated currency, being tied to US Dollar, and to keep Lari close to the dollar requires constant intervention. Therefore Georgian currency is vulnerable to speculative attacks, and this indeed is what has happened now.
“Speculators do always play their games and an artificially strengthened currency will always be vulnerable to speculative deals,” Eliava said. “And the national currency reserves will be spent on it unless nothing changes. The NBG is responsible for all this, because it does not control the situation and reacts only on results.”