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GEL Beats All Records: National Currency Sees Historical Depreciation

On December 15 GEL exchange rate dropped to historical minimum in relation to both USD and EUR. According to National Bank of Georgia (NBG), on December 15, 1USD=2.66 GEL and 1 EUR=2.83 GEL.

GEL exchange rate devaluation has become an inseparable part of Georgian economy over the past 2 years. The process started in November 2014, slightly declined in 2016 spring-summer period and intensified again in November. The Authorities have lost all arguments to substantiate and justify the national currency collapse and to shift responsibility onto others. As a result, previously, all failures were explained by exogenous factors, but these arguments do not work any more, because the process continues for 2 years. And now state officials apply absolutely strange phraseology to explain GEL devaluation reasons.

Some officials explain GEL exchange rate devaluation by Turkish Lira volatility, while another part is not sure GEL is depreciating. For example:

“We understand that we have a small and open economy. Consequently, we should be ready and we should realize that developments in our main trade partner countries cannot leave our economy without affect. Current tendencies of GEL exchange rate should be appraised as a volatility that is related to Turkish Lira. Consequently, this is a short-term topic. We expect GEL exchange rate to get stabilized”, Minister of Economy and Sustainable Development Giorgi Gakharia said.

Georgian society has already heard from state officials that GEL exchange rate depreciation is a temporary process and the exchange rate will be stabilized in the near future, but this is less expected that someone trust  the Economy Minister’s words, even more so  several months ago the Deputy Economy Minister forecast GEL exchange rate would be around 2.20-2.25 in December 2016. Today this person is the Deputy Finance Minister and continues “successful” forecasts on economic developments at the Ministry of Finance. Meanwhile, another deputy finance Minister is not sure GEL exchange rate is collapsing.

“I cannot name details and reasons. Do not believe in GEL depreciation. Everything will be OK”, Deputy Finance Minister Giorgi Tabuashvili noted.

There is nothing to say. It is very difficult not to see that GEL exchange rate has dropped to historical minimum. And this has not happened in one day. The country has moved to this outcome for 2 years.

Despite GEL exchange rate continues declining, NBG does not plan to tighten monetary policy. At the government meeting last week, the NBG monetary policy committee adopted a decision on maintaining the monetary policy rate unchanged.

Currently, the monetary policy rate stands at 6.5%.

The decision is based on macroeconomic forecasts, under which, in midterm period, demand factors affecting inflation  are weak. However, as a result of external shocks of last period and planned growth in excise tax, prices may rise single time, but this factor will have only short-term effect on inflation indicator.

The fact is that NBG failed to even get around the 2016 target inflation rate. As reported, target inflation rate in 2016 is 5%, while in November annual inflation was 0.2% and general deflation was recorded in October 2016. This signifies the NBG do not want to tighten monetary policy rate, on the one hand, in order to reach target inflation rate and it has even increased money mass in turnover. On the other hand, the NBG’s softened steps strengthens GEL exchange rate depreciation. We should also recall that amid sharpest currency crisis, Government decided to carry out large-scale dedollarization policy and announced several reforms in this light. Starting January 1, 2017, loans of about 100 000 GEL will not be issued in USD, while starting 2018 this limit will rise to 2018.

Naturally, dedollarization is a positive tendency, but not in currency crisis periods. At the same time, dedollarization is a long-term process and requires 10-15 years, in case of valuable and correct reforms. Moreover, the history has also proved that when GEL exchange rate is stable more or less, dollarization indicator declines in itself, without extra regulations, while amid instable exchange rate, dollarization ratio grows. This signifies that now when our population shows least confidence in GEL, Government and NBG plan to make them refuse USD and EUR, but this is very difficult to fulfill and the GEL quick devaluation proves this. After Government announced a new 10-clause plan, which also comprises dedollarization component, GEL exchange rate is depreciating at high paces and NBG does not plan to halt this process either.

Finally, I would like to say some works about our expectations. Authorities and NBG, last period, express pretensions against media and experts as if they were provoking panics in the society around the GEL exchange rate issues and creating incorrect expectations about the national currency. It is surprising that economic policy managers express similar accusations.

The question is why they cannot manage these expectations?! NBG refuses to make comments on GEL time to time and reasons are unclear. If you do not like existing expectations, you should just manage them yourself.

One of the NBG officials should make a TV address and spread correct messages, provide correct information to the society and manage the expectations that are perceived and understood incorrectly. However, the issue is that Government and NBG officials have made so many stupid statements around GEL exchange rate over the past 2 years that even their statements suffer from devaluation. How can the Deputy Economy Minister persuade  our citizens in GEL exchange rate power, when his forecasts about the GEL exchange rate strength failed in several months?!

By Merab Janiashvili
Economic Analyst
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