Georgian national currency has no grounds to become stronger
15 September, 2011
Georgian national currency has no grounds to become stronger

Increase of Georgian national currency rate this summer is a temporary event caused by international trends and it doesn’t speak of a long-term strengthening of Lari  as no economic factor determines strong national currency  in Georgia. 

Exchange rate of Georgian national currency Lari  increased by approximately 2.3% and 1.2% against Euro and US dollar respectively starting this past July to end of August. The exchange rate of Lari fixed at GEL2.40 against EUR1 on July 1st, 2011 crept up by 14

percentage points in two months and reached GEL2.26 to EUR1 by September 13, 2011.

US dollar depreciated by 2 points against Lari from GEL1.66 against 1USD fixed in July to 1.64 by middle of August. The change was not significant at first sight but the important factor was that the rate remained unchanged during a fortnight till September that happens quite seldom at Georgian currency market where rate of national currency changes almost daily by one-two point up and down.

Georgian Lari became stronger against Great Britain Pound (GBP) lately. The rate fixed around GEL2.71 against 1GBP by middle of July started falling in September and dropped by 8 percentage point [to GEL 2.63-GBP1] in two weeks.

Starting September Lari strengthened against the Swiss Franc (CHF) as well, that is the strongest currency at the international market today after depreciation Euro and US dollar and that was kept high against Lari unlike Euro and US dollar in this past July. Georgian currency rate depreciated from GEL 1.99 against CHF1 to GEL2.28 against CHF1 by mid July, however since September Lari went up by 0.4 point and reached GEL 1.88 against CHF in two weeks.

Georgian economic analysts think the recent appreciation of Georgian national currency is a temporary event caused by international not local market trends as depreciation of Euro and US dollar at global markets pegged up by fears on possible US default and underway debt crisis in several EU countries that affected Euro exchange rate. Economic analysts believe the international currency market will become more stable by end of this fall and many national currencies including Georgian Lari will depreciate as no economic factor lays ground to keep Lari high.

According to Levan Kalandadze, economic analyst, Georgian national currency exchange rate is held artificially by central bank and it has no reasons to be as high as it is today in spite of depreciation of Euro and the US dollar on which the import-dependent Georgia relies. Kalandadze assures Georgian national currency rate is defined by government that has its business interests in import rather than market.

“Our currency market is shaped out not in compliance with the international market trends but with Georgian government’s rude interference policy,” he told Georgian Journal.

Kalanadze expects increase of prices and depreciation of Georgian Lari soon in spite of the temporary price slump on food product caused by reduced oil prices and high crop this year. The point is that demand on food product is increasing and Food and Agriculture Organization of the United Nations (FAO) has already predicted a 30% price-growth on food.

Irakli Lekvinadze, an economic analyst, also expects Lari depreciation but not too much. According to him,  as far as the local economic factors look unfavorable to currency rate it will be fluctuating between GEL1.7-1.75 against US dollar by end-year.

The point is that Georgia suffers from big trade imbalance and lack of investments that affects the currency rate. Irrespective of 25% increase in export in the second quarter of this year import in Georgia is three-fold higher than export. Inflow of Foreign Direct Investments (FDIs) [one of the most important factors influencing the currency rate] shrank sharply since 2008 crisis and August war. USD 203 million of FDIs entered in the second quarter of this year in the country that lags behind the past year data USD 208 million [that was also insignificant] by 2%.

Meantime, according to National Bank of Georgia (NBG), Georgian national currency real effective exchange rate and nominal effective exchange rate became by 15.3% and 8.7% stronger in this past July compared to July of 2010 that means that inflation rate in Georgia’s neighboring countries is much lower than in Georgia that stood at 8.5% in July. Inflation rate in the similar period was fixed at 6.3% in Armenia, 7.6% in Azerbaijan, and 6.3% in Turkey.

According to Kalandadze, the reason is that NBG holds national currency rate high artificially to cut down inflation rate that is correct but not enough as far as the inflation rate reduces on paper alone as in actual life price-hike on food and service is a matter of fact.

“The NBG holds the national currency rate high to cut down inflation rate but it cannot last too long because we have no economy, we depend on import by 75% without any progress just like we depended a decade ago. It means our dependence on foreign imported goods did not improve and the currency rate must remain unchanged.”

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