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GEL Exchange Rate Depreciation Hits Historical Maximum in 2016

In 2016 the national currency depreciation and economic growth rate deceleration were key problems in Georgian economy.

GEL exchange rate collapse has affected both state budget and financial condition of our citizens. Despite  GEL exchange rate stability is one of the key factors for ensuing macroeconomic stability of the country, Government has taken no measure in practice to halt the national currency devaluation process that emerged at the end of 2014.

Over the past 2 years GEL depreciation has become an inseparable problem of Georgian economy. The process started in November 2014, turned smoother in spring-summer 2016 and renewed downfall in November 2016. National Bank of Georgia (NBG) was following this policy in synchronous regime that started under the previous president and continued in 2016 too. However, one exception was recorded anyway. In Spring NBG tightened monetary policy and extremely cut the volume of refinancing loans. It should be noted that in that period annual inflation rate missed target indicator and the central bank had to take decisive steps.

However, NBG renewed the crediting of commercial banks immediately after inflation growth risks disappeared (in autumn annual inflation dropped below 1% and even deflation was recorded for a short period). In December 2016 the volume of issued credits to commercial banks made up 1.5 billion GEL and this is a historically maximum figure.

In 2016 GEL exchange rate slightly fell, but in spring the devaluation process was replaced by extreme strengthening. It should be noted that the GEL exchange rate at the end of spring and in summer period was stable more or less and was showing slight strengthening signs.

National Bank was buying USD on currency market to prevent extreme hike in GEL exchange rate. As a result, in March-August period NBG purchased 278 million USD. At the end of August GEL slightly strengthened to 2.27 point against USD. Encouraged by GEL strengthening, NBG took sharp decisions and lowered monetary policy rate to 6.5% from 8% stage by stage. Moreover, under the pretext of dedollarization policy, NBG also revised obligatory reserves requirements for commercial banks. Namely, under the NBG decision, starting June 16 minimum reserve requirements on GEL-denominated one-year resources made up 7% instead of 10%. As to USD-denominated resources, the reserve norm increased to 20% from 15%. Obligatory reserve norm on foreign currency denominated resources with the maturity period of 1-2 years also increased to 10% from 5%.

It is interesting that in 2003-2004 the obligatory reserve norm was equal in GEL and USD, in practice, and it ranged from 13% to 14%. In the following years the reserve norm for GEL-denominated resources started declining, while the norm was maintained at 13% on USD-denominated resources. In 2007-2008 reserve norms were revised several times, but the reserving norm in GEL and USD was equal. Starting 2010 the NBG increased the reserve norms to 10% from 5%, and later to 15%. As reported, starting June 16 commercial banks have to reserve 20% of attracted funds.

Starting autumn the Georgian national currency is demonstrating devaluation tendencies and in September-October GEL exchange rate dropped to 2.30-2.31 position from 2.27. In that period the NBG was carrying out interventions on currency market to prevent extreme depreciation.

In August to November period, amid GEL exchange rate devaluation, the NBG supplied about 180 million USD to the market. However, the NBG ceased interventions on the currency market and GEL exchange rate was beating historical records day to day. As a result, starting November up to mid December, GEL exchange rate against USD was extremely falling and on December 1 USD against GEL was strengthened to 2.78 GEL. NBG intervened in currency market only on December 20 and sold 40 million USD. Depreciation paces were halted, but the process may erupt again in 2017, because NBG policy has not changed.

Somehow or other in 2016 currency crisis was sharply reflected on Georgian citizens, despite under the government plan, for two months in 2017 loans taken in USD will be converted into GEL and state budget will subsidize every 20 Tetri. This program cannot essentially alleviate condition of our citizens. The fact is that neither government nor NBG can answer questions around GEL depreciation process that started 2 years ago.

Some officials only talk about external factors, but the question is whether government and NBG genuinely want to stabilize GEL, because all steps taken by NBG over the past months were directed to GEL depreciation, not its stabilization. Therefore, we should not expect the national currency stabilization until Government and NBG have not decided to strengthen GEL exchange rate. Before, it is difficult to make any forecasts, even more so NBG actively grows money mass in turnover, while the Authorities grow budget deficit.