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Georgia is Experiencing a Full-fledged Currency Crisis

Georgia is Experiencing a Full-fledged Currency Crisis

An interview with a former Vice-president of the National Bank of Georgia Merab Kakulia

What impact will a government reshuffle have on the economic situation of the country, including the national currency? 

I do not think that the change of Minister of Sports will influence the currency market. And in general, changes in government will not cause serious changes. We are dealing with the fundamental causes that predetermined such a serious fall of the national currency. And these factors have not disappeared; they still exist and continue to deepen. First of all it should be noted that export decreased by 30% in the 1st quarter of 2015 compared to the same period in 2014.

This process continues today. In particular this applies to exports to Azerbaijan, which is now also experiencing serious problems fue to the 33% devaluation of the manat. Azerbaijan was one of the largest export markets, and a deterioration of the situation there will affect the situation in our country. Turkey is also experiencing serious problem , where the currency has depreciated by 5% during the year. Based on this, situation in exports has not changed and, unfortunately, in the near future is not likely to change.

The second factor is remittances. The statistics show a slight increase, but if compare to last year, in any case there is a serious backlog, and I do not think that some improvement in Russia will be able to change this trend for the better. With regard to investment, ie statistics for the 3rd and 4th quarters of 2014, which showed an increase in investment, and we must assume that in the first months of 2015 inertia will continue.

However, it must be borne in mind that the official figures on investments do not always coincide with the real – in particular, about 25% of the statistics is reinvestment, that is money in circulation inside the country, and do not come from abroad. In addition, there is the so-called debt between the companies, when a private company cannot repay a debt to its foreign parent company, and the amount of shortfall is accounted an investment. However, in doing so, virtually no money come into the country.

Can we say today that the country has a financial crisis? 

Definitely we can say that the country is suffering a full-fledged currency crisis caused by fundamental factors, although of course, market fluctuations played its role that often can affect the supply and demand for foreign currency. For example, recently the lari fell sharply, and most likely it is connected just with market fluctuations. At this time of the year , the importers need a lot of currency to meet their obligations. It always has been, but we did not notice, because they were active sources of receipt of currency, and today the situation is quite different. 

At the same time, the demand for the currency remained virtually unchanged, imports declined slightly and this imbalance is already evident in market fluctuations. Importers need the currency, but it is not present in the system in the required quantities. There is one thing about which neither the representatives of the government nor experts say almost nothing – the corporate debt to foreign companies and financial institutions. In the first quarter of 2015 companies had to pay $ 320 million that is an additional pressure on the currency.

When it comes to fundamentals factors , where is the way out? What can be done in the near future?

A quick and short-term solution to the problem unfortunately does not exist. Concerted and concrete steps from the government and the National Bank are needed, but no one should expect a quick effect. The first step is to remove pressure from market factors that create negative expectations. At the same time it is not necessary to carry out large intervention by the National Bank.

If analysis of the situation shows, then interventions can be continued, it all depends on specific factors. We cannot spend foreign exchange reserves too actively , as this will cause a decrease in the money supply, and it will worsen the economic situation of the country. As a reduction in the money supply is not a method to improve the economic situation. I agree with the position of the current President of the National Bank, who believes that the sharp decline in the money supply brings more negative than positive.

In general, of course, the National Bank will not be able to cope with the problems alone. A more active work of the government in terms of export promotion is required. It’s bad that the government has begun to speak about it just now. We should not forget also that the foreign currency is needed not only to importers, but also to commercial banks, which also have debts to foreign partners that should be covered in dollars.

Many businessmen say that the government should cut social spending. How can it help? 

This approach is justified when we see the negative impact of the budget on the exchange rate. It is not happening now. Accordingly, the reduction of social spending will give nothing. At this stage, the impact of budget expenditures on the foreign exchange market is minimal, as well as in terms of money supply.

We should not look for a way out of the situation in these areas. The Government must think about promoting exports. Tourism is another very important source of foreign currency. In the first three quarters of 2014 the number of tourists has grown consistently, and this year began to decline. That is, it turns out that tourism is not a priority for the government? But this is a very wrong opinion, as in the medium term, tourism can play an important role in addressing these problems.