Georgian currency puzzle
27 February, 2014
Georgian currency puzzle
The frequent fluctuation of the Laristill puzzles business and consumers as prices rise. Sector pundits ascribe the unstable Lari to the high dependence of Georgia on imports, and advise Georgian government to encourage development of national industry properly. On the other hand, they blame the National Bank of Georgia for an inadequate monetary policy, and suggest more open currency trade as a solution.
The sudden almost 8% drop in the value of the Lari from November 2013 to the end
of January 2014 (from GEL 1 against USD 1.65 to GEL1 to USD 1.78) made the market nervous and jacked up the monthly Consumer Price Index (CPI)by 1.5% and 0.8% in December 2013 and January 2014, while salaries did not increase.
Normally, currency fluctuation is not a tragedy where governments must insure an increase in salaries by a similar proportion of the currency devaluation. But this does not happen in Georgia - that causes the impoverishment of the population, Lia Eliava, a financial market analyst, said. Therefore, although the Lari recovered early in February to GEL 1.72-1.73, neither business nor consumersfeel at ease. Georgian authorities believe overreaction caused the Lari to plummet.
“With all responsibility I declare that if not for the agitation, theLari exchange rate would not have changed so much,” Nodar Khaduri, Minister of Finances of Georgia, said to media on February 21. “The artificial agitation created two reactions: those who had Lari were anxious to sell out as soon as possible, and those who had US dollars tried to keep them.”
The Minister also indicated that the NBG, a fully independent body, is responsible for monetary policy, and all questions over the currency exchange rate must go to it and not to the Ministry of Finances as has happened.
Analysts agree that authorities bear no direct responsibility for the national currency rate, but the governmental policy does determine the currency value in any country, so it cannot escape responsibility for sluggish Georgian exports and the 80% dependency on imports.
On the other hand, NBG also bears indirect responsibility for the currency rate. “The law obliges the NBG to be responsible for stable prices but not a stable exchange rate,” Soso Archvadze, an economic analyst, explained to Georgian Journal. “However, inasmuch as the currency rate affects prices the NBG has to attend to that, and it actually does so by interference in the currency market.” And the inappropriate interference policy of the NBG did cause public agitation over the Lari’s value – too quickly money was released into the economy, which accelerated the rate at which money was pumped out, as both Eliava and Archaize noted.
“The NBG pumped out about GEL 250 million from circulation first, and then quickly returned it back - that created instability; such a quick shift of money supply and take-off creates artificial demands, or adeficit on foreign currency,” Archvadze said.
Some broker companies think making currency trade more open and transparent can be a solution to the problem. The Lari rate is settled along the online interbank foreign exchange market at Bloomberg trade system, where the NBG plays first fiddle as it disposes of the largest financial resources.
However, only commercial banks and branches of foreign banks licensed in Georgia can participate in this market. Non-admitted individuals and companies cannot watch the trade trends, and they learn the already settled currency rate at the NBG web-site no earlier than 5 pm every day. The best international practice admits everyone who can get an official permit to such a currency trade venue.
“Adoption of such a practice in Georgia would have increased the transparency of the price-making process of national currency. Both business and private investors might have made a more realistic prognosis, which of course will have a positive impact on the general pricing policy in the country; consumer prices will get reasonable and predictable,” a representative of a Georgian investment bank who preferred to remain unnamed told GJ.
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