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Bloomberg: Central Banker Sees Georgia Turning Corner on Dollarization

Georgia is getting closer to reducing dollarization and building a more stable role for the national currency as the economy recovers from regional shocks, the Black Sea nation’s central bank governor said.

Dollarization, the widespread use of dollars for transactions that’s a legacy of hyperinflation and bank failures in Georgia, is declining from the last year’s peak of 70 percent, Koba Gvenetadze said Sunday in an interview at the International Monetary Fund summit in Washington. While there was no hope of immediately eradicating the practice, the local currency is increasingly being used for deposits, he said.

“The dollarization trend looks to be bottoming out,” Gvenetadze said. “I see quite a lot of risks from a highly dollarized economy. I want to implement measures that would contribute to its reduction.”

Gvenetadze, 45, became governor in March, replacing Giorgi Kadagidze after the government accused the central bank of doing too little to defend the lari, which plunged 21 percent against the dollar in 2015. The bank, which has faced fallout from recession in Russia and the armed conflict in Ukraine, will examine past examples from Peru, Israel and Poland on boosting trust in the domestic currency, Gvenetadze said.

Lari Rebound

While expressing confidence that the lari will be stable, the governor pledged to keep the exchange rate freely floating to act as a “shock absorber.”

Georgia’s currency has rebounded 2.4 percent this year against the dollar, while the Russian ruble has jumped 19 percent. Neighboring Azerbaijan, which had to intervene this year to defend banks amid savers fleeing the national currency for the safety of dollars, is heading for a 2.5 percent decline in the manat in 2016.

The central bank in Tbilisi, which has sold $140 million since August to curb volatility in the lari, must synchronize steps with the government to increase trust in the currency, Gvenetadze said.

 “We need to be patient about the process, it won’t be very quick,” he said. “But the later we start, the later we’ll have results.”

Gvenetadze doesn’t see a risk of deflation, projecting an increase in consumer prices of more than 1 percent this year, less than the central bank’s target of 5 percent. He predicts 3 percent inflation in 2017, which the bank had previously projected for 2018, and sees gross domestic product expanding 3 percent this year and by as much as 5 percent in 2017.