Banks vs. GEL?
28 May, 2015
Banks vs. GEL?
The sudden strengthening of Georgian national currency after its equally sudden downfall has created a fertile ground for suspicion of banks falling back into the old grooves of speculation. Most of the blame is directed at the National Bank of Georgia for not regulating the banking sector properly. Giorgi Kadagidze, Governor of the NBG, is frequently said to be the one responsible for this. The Parliament does not rule out setting up a special
investigative commission that will dig deep in the currency depreciation story and will find answers to the unending stream of questions.

The government and analysts believe the NBG did not use its full kit of monetary instruments to keep the lari stable.

The main of these questions is whether or not Georgian commercial banks have rigged the currency market, leading the lari to a 34 percent depreciation in value that began last November. Another, even bigger question is whether or not the NBG handled this depreciation “in an artificial and harmful way,” as many analysts and even the government suspects.
The government and the analysts believe the NBG did not use its full kit of monetary instruments to keep the lari stable. Neither did it disclose information about outflow of the capital from a country through banking transactions. This alone raises many questions. On May 14, Vice Prime Minister Kakha Kaladze said in one of his TV appearances that lari’s depreciation is a political and artificial process and hinted that underhanded manipulations by the banking sector might be behind this.

Giorgi Kadagidze, the NBG Governor, ascribes the lari depreciation to external shocks and macro-economic factors alone. As for internal factors, Georgian Central Bank believes the weak economic stance is the reason for a sharp drop in the lari’s value. And only the government bears responsibility for that.

“We have repeatedly declared that we cannot get the detailed information from Kadagidze’s office. The law does not give us this privilege,” Kaladze said. “We do not know what transactions Bank of Georgia and TBC Bank [the largest Georgian banks] have carried out over the recent few weeks. The NBG has a way to find out, however; it can interfere in the process and help authorities solve the problem Georgia is facing right now.”
This statement gave a rise to acute debate and a split in opinions. One part of analysts believes the statement is not without merit, since banks are generally inclined towards speculations. They claim that there are many examples proving this, such as President of Moldova recently naming banking speculations among major reasons for depreciation of Moldovan currency, or the U.S. and EU authorities fining five leading global banks for six billion USD as punishment for rigging the foreign exchange rates. Therefore, the analysts call on the government to investigate the events transpiring in Georgia.
“I do not accuse the banks as such,” says Demur Giorkhelidze, an economic analyst. “They are commercial structures and are always aimed at increasing their profits. The blame goes to the regulatory body that has failed to rein the sector in.”
The point is that Giorgi Kadagidze, the NBG Governor, ascribes the lari depreciation to external shocks and macro-economic factors alone: the general strengthening of the U.S. dollar, languid inflow of tourists and the economic crises in Russia and Ukraine, with the latter dealing an especially grievous blow to Georgian export and money transfers. As for internal factors, Georgian Central Bank believes the weak economic stance is the reason for a sharp drop in the lari’s value. And only the government bears responsibility for that.
Irakli Dogonadze, Executive Director of the Center for Analysis and Prognosis at Tbilisi State University, thinks that the NBG did not act properly, as it did in the past. For example, in 2008, the Georgian currency resisted the double impact of the short-lived war with Russia and the global financial crisis.
“If we take the macro-economic data, our statistics were far worse in 2008, but the lari remained more or less stable. If we take this and the NBG’s usage of monetary tools to support the currency in 2008 into account, the fact that it didn’t happen now definitely props up some question marks.”
The sudden and quick strengthening of the lari on May 20-23, which coincided with the NBG annual report to the Parliament, has only made the suspicions more acute. Value of the currency has unexpectedly bounced from 2.32 GEL per 1 USD to 2.25-2.27. According to analysts, the influx of foreign currency was not significant enough to cause such a quick strengthening of the lari, which leaves a lot of room for mistrust and puzzlement.
The most bizarre thing of all was that the currency exchange outlets traded at the rate far below that the official one on May 21, when the Parliament started the hearing of the NBG annual report. This so-called “street rate” traded 1 USD at 2.25 GEL, while the official NBG rate was 2.32. The rate was sliding as low as to 2.22 GEL that day, but after the NBG disbursed 1.7 billion GEL of refinancing loans to commercial banks, the lari started depreciating again and the rate stopped at 2.28-2.29.
Levan Kalandadze, an economic analyst, believes the NBG “spoiled” the market. Kadagidze, staunchly denies the accusation.  
However, some analysts as well as banks and business associations claim the accusations leveled against banks are groundless and the government is simply looking for a scapegoat. They warn of the information on international transactions being confidential, and if the government demands to divulge it, such an action will violate the banking secrecy and undermine the investment climate.

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