Saving Private Lari - Georgian Currency at a Critical Point
26 February, 2015
Saving Private Lari - Georgian Currency at a Critical Point
The Georgian currency has not sunk so low since 2004; it did not happen even during the double impact of the August War and financial crisis in 2008.

In spite of the stronger monetary policy the National Bank of Georgia undertook a week ago, the lari’s depreciation is coming dangerously close to a critical level of 25 percent. If the lari crosses this threshold, a negative economic scenario of unemployment and economic recession will appear on
the horizon. To avoid the impending negative prognosis, analysts call upon both the National Bank and authorities to act adequately to carry out urgent remedies to extinguish the fire as soon as possible.
“We witness the signs of an economic shock, expressed in the decrease of exports, money transfers and influx of tourists,” said Giorgi Kadagidze, Head of the NBG, in his interview by Rustavi 2 TV on Sunday, dedicated to the sharp weekly devaluation of the lari.
“We closely monitor the prices every day and will intervene again if there is a necessity, but we should remember that the price of our interventions is steep and results in reduced volume of money, higher interest rates on credit, less sales and less access to loans. There are other negative results and we have no right to make a mistake,” Kadagidze explained, promising that the NBG will guarantee the stability of the both financial sector and consumer prices.


Some sector pundits believe the NBG has already made big mistakes when it let the currency plunge so deeply and so quickly: the GEL depreciated by 24-25 percent since mid-November of 2014. It gathered speed very rapidly, losing more than 15 percent of its value in January-February of this year.
Analysts believe this figure is too high to explain it just by internal and external macroeconomic factors. What puzzles analysts most of all is that the deepest slump happened exactly a week after the NBG announced the launch of a stronger monetary policy. On February 11, NBG raised rates to 4.5 percent and intervened into the currency market with 40 million USD. On February 19, it made another such intervention, but instead of expected recovery, the lari flipped by 3 percent on the same day. Ultimately, last week the lari beat its own record, devaluing by almost 7 percent (hitting 2.17 GEL against $1 and still steadily continues to fall – going as deep as 2.42). The Georgian currency has not sunk so low since 2004; it did not happen even during the double impact of August war and financial crisis in 2008. geotv.ge
“Depreciation of the lari is not a tragedy in itself; it boosts exports, but not when it happens at such a quick pace. 25 percent depreciation would be nice if it happened gradually, over the course of a year, but not in three months. But rapid currency devaluation robs the population and leaves it vulnerable to price hikes. Last week’s drop made me particularly nervous. I am afraid that the National Bank is simply incompetent, since it let the process go so far,” said Dietrich Muller, a co-founder of Georgian Investment Group+, in an interview with Georgian Journal. “The NBG is a serious body with serious tools to regulate monetary policy, and it receives excellent remuneration for that. However, it has obviously failed in its mission. Its actions were inadequate and belated. It was not difficult to guess that once the oil prices dropped dramatically and the U.S. stopped its quantitative easing last year the dollar was going to gain in value, and the NBG had to measure the risks for the Georgian economy and carry out adequate policy to be prepared for that. ”
Other analysts believe responsibility for the currency’s depreciation remains with the government, as it is slow in reforms and has made anti-liberal steps recently. For example, it adopted a very complicated visa regime months ago, thus reducing the tourists’ influx in 2014. It did not drop, but considering double-digit figures of unprecedented growth over the recent years, the amount of tourists increased only by nine percent in 2014.
“The causes and implications of the “unavoidable” depreciation of the national currency should also be investigated, and once the situation is comprehensively reviewed, action should be taken accordingly” – said International Monetary Fund (IMF) Resident Representative in Georgia Azim Sadikov, following recent regular meetings with Georgian authorities where parties discussed the current economic situation in Georgia and the “unavoidable” depreciation of the Lari
If the government does not take more liberal and coherent steps as soon as possible, the situation may get very dramatic, claims Levan Surguladze, Chairperson of the Supervisory Council of Caucasian Business Group. The point is that more than 60 percent of banking loans, especially business loans and mortgages, are disbursed in US dollars. This means that borrowers face unplanned expenditures that may exceed their income if currency depreciation is not halted.
“Twenty-five percent devaluation is already a critical point. If this threshold is crossed, we are going to be facing unemployment and bankruptcy,” Surguladze explained to GJ. “It is particularly alarming for businesses that create jobs. Such steep depreciation means that the loans may become at least 25 percent more expensive, and to compensate the unforeseen expenses, businesses will increase prices; in turn, this action will reduce sales. And if the process becomes overly aggravated, businesses may begin to fire their workforce, which will lead to insolvency and create problems for banks. This will put a start to an extremely vicious circle.”
Georgian government has already halved its old forecast of economic growth for 2015 from 5 to 2-2.5 percent and is determined to “tighten the belts” of budgetary expenditures by 12 percent. But Surguladze believes that authorities have to undertake more radical and urgent steps that may bring in foreign currency, the first of them being a re-liberalization of the visa regime.

Georgia’s Neighbors are Also Facing Currency Devaluation

A Brief Overview:


  • Georgia is not alone in its plight. The South Caucasus region and parts of the post-Soviet space are suffering from currency devaluation as well.
  • For instance, last year the Russian central bank spent more than 100 billion USD and raised the monetary policy rate to 18 percent, but to no avail: The Russian ruble deprecated 100 percent against the US dollar and more than 86 percent of this slump took place in the timeframe between August of 2014 and January 2015. This is a record high after the economic collapse of 1998.
  • The Ukrainian hryvnia depreciated by 350 percent in 2014 and current war costs comprise 6 million USD per day. Its fiscal deficit reached five billion USD and inflation exceeded 28 percent.
  • The Armenian dram suffered a 17 percent currency depreciation in the period from August of 2014 to January of 2015 in spite of interventions by the central bank of Armenia. The most crucial episode of the dram’s depreciation took place in December of 2014, when it lost 12 percent in value. However, the Armenian currency has remained stable this year, unlike the Georgian lari, which lost 15 percent of its value in January-February of 2015.
  • Although the Azerbaijani Central Bank spent a billion USD to maintain the value of the manat (which exceeded the US dollar in value up until February 21st of this year) it nevertheless depreciated by 33-34 percent on February 21st, falling from 0.78 against one US dollar to 1.05. ACB stopped intervening and instead declared that the manat is no longer tied to the US dollar alone and now also depends on the euro. The oil price slump is the key reason that affected Azeri currency, analysts say.
  • The Turkish lira has depreciated by 10 percent since August. Analysts say this is a big drop for a country like Turkey, especially considering its immensely strong export and tourism sectors. It is very likely that a global slowdown and a decline in demand had a negative impact on one of the fastest growing emerging economies.

The Banking Sector Benefits from Devaluation of the Lari

The income of banks is divided into interest and non-interest revenue. In turn, the latter is divided into commission and currency conversion profits. In 2014, the total commission profits of banks comprised 284 million GEL, while conversion profits comprised 118 million. Income increases along with the growth of the banking sector, and as the currency devalues, selling and buying it boosts the banks’ profits immensely. According to 2014 statistics, if profit solely from currency conversion comprised nine million GEL per month on average, then in December it reached a whopping high of 23 million, as people rushed en masse to convert their savings.

geotv.ge
Print
Other Stories
Everything of comfortable life in one space – Second part of construction of one of the largest apartment complexes finished in Tbilisi
Apartment in ecologically clean environment, thousands of square meters of green yard, swimming pools, places for various sports activities, treks for walking and running, commercial spaces – all these available in one space is not a fantasy.
Batumi awarded Europe's Leading Emerging Tourism Destination 2019
World Travel Awards Europe Gala Ceremony 2019 took place on the 8th of June in Madeira, Portugal.
Coca Cola to open new factory in Georgia, will hire female drivers
Coca Cola is opening new factory in Georgia in December.
World's best party supply company now on the Georgian market
The largest party supply store in Georgia - MyDay is launching as the official distributor of AMSCAN from 2019.
Live as a marketing tool and an unprecedented live stream launched by Livetag
Sharing information has become smoother and more versatile in today’s technological world. Recently, live streaming, an online streaming media has become especially popular.
Theme and program of Caspian Energy Forum Tbilisi – 2019 changed
“The 8th International Caspian Energy Forum Tbilisi – 2019, scheduled for June 21, will focus on the development of the Azerbaijan-Georgia relations in the field of economy and energy”,
Misunderstanding over Poti deep sea ports
There was misunderstanding around deep sea ports in Georgia – in Poti.
High demand for dollars or the investment decline – Why Georgian Lari depreciates
$1 equals GEL 2,7470 in the official rate set by the National Bank of Georgia (NBG).
PSP Group confirms negotiations regarding purchasing of GEO Hospitals
PSP Group confirms negotiations regarding purchasing of GEO Hospitals.
New life to be given to Dashbashi Canyon
Georgia’s Agency of Protected Areas is planning to give new life to Dashbashi Canyon in Tsalka (southeastern Georgia).
Who is constructing “Khadori 3” Hydropower Plant in Pankisi Gorge?
Clashes broke out in Pankisi Gorge, Georgia’s northeastern region between special forces and residents
Business Positive – Successful radio program from Radio Positive
Starting point of radio program Business Positive is to meet interesting people, communicate with them and deliver information that is interesting for the audience.
A factory of electric vehicles to be built in Kutaisi
Prime Minister Mamuka Bakhtadze stated that a factory of electric vehicles will be built in Kutaisi at the presentation of the Aigroup business group.
Qvevri-shaped hotel complex to be built in Telavi
A Qvevri-shaped hotel complex is scheduled to be built in the village of Shalauri in Telavi, Kakheti (east part of Georgia).
Georgian designers presented at Fashion World Tokyo 2019
The products of 11 Georgian designers are showcased at Fashion World Tokyo 2019,
Silknet raises $200 million in Eurobond issue
27 March 2019 - JSC Silknet (“Silknet”), one of Georgia’s leading telecommunications operators, has successfully priced a debut $200 million 5-year 11% senior unsecured bonds issue (the “Notes”).
Pistachio trees will be planted in Georgia
Dozens of hectares of Pistachio are planned to be planted in Georgia this year.
Toyota Safety Sense and Hybrid Technology
Toyota Caucasus, has presented two new models the 5th generation RAV4 and the 12th generation Corolla at Rustavi International Motorpark, several days ago.
Bidzina Ivanishvili “became number one oppressor of businesses in Georgia” - ICC Georgia chairman Fady Asly
Mr. Ivanishvili promised the business community to protect them from harassment and pressure, unfortunately his words died with the sunset of that day
The best brands of Belarus will be exhibited on a large-scale exposition in Tbilisi
"The Belarusians like to come to Georgia to relax near the sea in Batumi as well as to stay in sunny Kakhetia."
Don’t treat business like a hooker! - Georgian businessman Vasil Soprpmadze addresses politicians
Businessman Vasil Sopromadze, founder of the company "Fresco", addresses politicians
RAV4 No Compromise and Corolla Set to Impress – Two New Cars Presented by Toyota
Toyota Caucasus, the company constantly aspiring to greatness, has presented two new models the 5th generation RAV4 and the 12th generation Corolla.
Mamuka Khazaradze quits TBC bank, does not sell the TBC Bank share
I made a decision to leave TBC bank where I spent 27 years of my life
10 Reasons to buy an apartment in the suburbs
There is a tendency for Tbilisi dwellers to move from central parts of the capital to the suburbs.
Georgian citizens are granted the right to work in France
The French Embassy in Georgia made remarks on granting Georgian citizens the right to work in France
PHOTO OF THE DAY
GEL Exchange Rate
Convertor
23.06.2019
24.06.2019
USD
1
USD
2.7798
2.7798
EUR
1
EUR
3.1442
3.1442
GBP
1
GBP
3.5220
3.5220
RUB
100
RUB
4.4129
4.4129
Other Stories
Recently Toyota rolled out Global Campaign under this slogan that reflects the Olympic and Paralympic Spirit of Encouragement,
A couple from Switzerland combines Swiss tradition and technology with Georgian products. Their cheese is made in the Georgian mountains and sold in local stores and hotels.
It has been more than five years since the residents of Lilo village, near Tbilisi, cannot open their windows.
63 000 GEL was received by the Georgian Agro Export Group which is just a small part of the European Neighbourhood Programme for Agricultural and Rural development.
Georgian entrepreneur Guka Tavberidze, who runs his own business in the UK and does it quite well, has been invited by BBC
The grand opening of 7-star The Biltmore Hotel Tbilisi took place in Georgia’s capital on July 31.
DUSHETI, Georgia – The Georgian government and the World Bank will allocate USD 5.6 million (12 million GEL) to fund
A new Georgian clothing brand named Person has emerged in Georgian market.
Georgia is in the midst of an economic maelstrom, Euronews reports.
Situation at Georgia’s mineral water market is interesting: over the last year, the volume of export has grown by 56 percent. According to “GeoStat”, over $114 million worth of mineral water was sold
GEL Exchange
USD
1
USD
2.7798
EUR
1
EUR
3.1442
GBP
1
GBP
3.5220
RUB
100
RUB
4.4129