The Lari Saga
26 September, 2015
The Lari Saga
Is The Lari Broken?

Lari’s Lazarus Moment

The lari (GEL), gained 1.68 percent against the U.S. dollar on Tuesday, after the National Bank intervened, selling off 26.96 million USD. On September 21st, as the lari approached an all-time low, PM Irakli Garibashvili met NBG Governor Giorgi Kadagidze, who said that the bank would intervene in the foreign exchange market “if necessary.”

Last week the lari reached a new low, becoming available to the population at the incredible rate of 2.54
GEL per 1 USD in some exchange booths and causing a new wave of panic. At the moment, the rate teeters somewhere between 2.44 and 2.46, but the damage has already been done and the Georgian economy suffered considerably.

63 percent of current loans held by Georgian citizens are in USD, which means that since most of them receive their currency in the slowly declining GEL, it will gradually become harder and harder for them to pay the banks back. This is true not only for the population: 73 percent of Georgia’s national debt ($4.1 billion) is comprised of foreign debt, due to be paid back in dollars and euros.

Certain members of the Ministerial Cabinet have already begun talking about how the currency’s ongoing instability may be a harbinger of dire straits for both the country’s economy and its people. The banks keep their long-term lending resource primarily in dollars and accordingly, most of their loans to the population are also in that currency. Namely, 63 percent of current loans held by Georgian citizens are in USD, which means that since most of them receive their currency in the slowly declining GEL, it will gradually become harder and harder for them to pay the banks back. This is true not only for the population: 73 percent of Georgia’s national debt ($4.1 billion) is comprised of foreign debt, due to be paid back in dollars and euros. Therefore, the geotv.geburden of debt grows on the whole country, proportional to the national currency’s decline.

Ask yourself a couple of questions: How wise is putting millions into the healthcare, education and agricultural sectors when the currency is again losing its footing? What is the ultimate cost of state socio-economic programs?

So what changed about the Georgian economy in recent years to cause such a massive devaluation of the lari? It is hard to ignore the external factors when discussing this topic, but it also needs to be said that the state budget has also greatly contributed to the current crisis. The sharp increase in funding for social and healthcare programs, along with rampant raises for school teachers and administrative personnel was an inflationary hazard before it was even implemented, but the public sector’s numerous warnings went unheard and the government turned out to be completely unprepared for the consequences of its actions.

Ask yourself a couple of questions: How wise is putting millions into the healthcare, education and agricultural sectors when the currency is again losing its footing? What is the ultimate cost of state socio-economic programs? As a rule, our government avoids talking about economic results of political decisions, since they sometimes prove downright disastrous. For example, both the parliamentary majority and the government had high hopes for economic recovery resting on the output of the heavily coddled agricultural sector, but recent statistics show that the idea has fallen through. The sector has failed to develop even despite the creation of artificial demand, but the ruling party insists on continuing on the course it selected.

However, all the subsidies poured into agriculture place an even heavier burden on the Georgian taxpayer. An old Georgian proverb says, “Hog the blanket as far as it can stretch,” and the current government seems to be doing exactly that with a new healthcare program it developed: It allows free access to everything, from routine medical checks to surgeries. However, aside from this new program evidently being well in over its head budget-wise, experts claim that the program was developed in complete ignorance of market principles. It envisages the complete replacement of private clinics with state-run ones. Albeit an age-old debate in nearly every country, notably in the U.S. at the moment – but when socialism runs amok in the healthcare system, it doesn’t take a genius to realize that high-quality service provided by the private sector will no longer be within a common citizen’s reach. [Editor’s Note: In all fairness it should be noted that the previous private healthcare system in Georgia also had a lot to be desired and drastically needed reform.]

Considering the points stated above, Georgia’s current government will have to heavily rethink its policies to stop the national currency’s devaluation. Otherwise it is entirely unclear what purpose these state loans – sized in billions –serve and how Georgia’s future generations are supposed to pay them back.

Rusudan Shelia
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