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Lari Strengthens again: Economist Overviews the Trend

The national currency of Georgia is strengthening at high paces. Starting March 2016 LARI started revaluation in relation to USD.

Our society has seen the national currency affixed even at 2.49 point against USD, after the 18-month history of depreciation ended in hitting the historical bottom of 2.49 point. Starting March 2016 the National bank of Georgia (NBG) has been actively interfering in the currency market, buying USD and trying to prevent quick appreciation of LARI, but the fact is the exchange rate is rising. Over the past 2 months, the NBG has purchased 195 million USD through currency auctions.

What are preconditions for the national currency appreciation?

Even the NBG finds it difficult to answer this question, while some economic experts (with rich fantasies) provide  bold ideas. For example, for a certain period, they were naming  the deficient spending. The 2016 state budget is planned by 3% deficit and this is a norm. The budget is spent under the plan and nothing special has changed in the fiscal policy.

The more interesting version was related to the 15th of March, when companies pay the profits tax. Somebody would think that the 15th of March had never come to Georgia previously. Some versions relate the LARI revaluation even to the spring commencement and so on.

If we revise several economic indicators, we will see that there is a slight improvement in financial reports of our country. For example, in January-April Georgia’s foreign trade turnover marked 3287 million USD, up 8% as compared to the same period of the previous year; including the exports marked 608 million USD, down 12% year on year and the imports amounted to 2679 million USD, up 14% year on year. Georgia’s negative trade balance marked 2071 million USD in January to April 2016 and accounted for 63% of the foreign trade turnover.

It should be noted that medications emerged as major imports item in January to April 2016 and the imports of medications marked 723 million USD, i.e. 27% of total imports. The main ratio is recorded for Hepatitis C program medications that were transmitted to the Georgian party free of charge. Consequently, foreign currency outflow from the country was not recorded.

At the same time, in April 2016 money transfers to Georgia made up 94.8 million USD, i.e. 214.7 million GEL, up 4%  (3.7 million USD) compared to the same period of 2015. Money transfers to Georgia were declining for more than one year because of economic difficulties in the Region.

The tourism and revenues from the tourism sector should be also stressed. This is an only field that is growing irreversibly over the past years. In January to March 2016, tourist inflows to Georgia made up 1.134 million, up 14.7% compared to the same period of 2015.

Special regard should be paid to public expectations for the GEL exchange rate changes.

At the beginning of the year, everybody knew the GEL exchange rate was declining and the national bank would not take steps to curb the national currency depreciation. Consequently, everybody knew the exchange rate would worsen. Today we have a different situation.

Everybody sees the GEL is strengthening and the NBG actively applies currency auctions instrument for stabilizing the GEL exchange rate. Consequently, the trust and expectations have increased. The Finance Ministry and the NBG president stress these improved expectations.

„There are certain preconditions for the GEL exchange rate strengthening. In January to April the commodity exports declined by 12%. The figure is lower compared to previous indicators. The imports contraction continues. The whole situation suggests that in January to April, as compared to the previous years, excluding Hepatitis C medications, the current account has improved by about 300 million USD. Thus, there are preconditions to strengthen LARI. Expectations in our population are very important. Inflation reduction tendencies also generated positive expectations”, Koba Gvenetadze, President of the National Bank of Georgia, noted.

„At the end of the last year and at the beginning of this year we were talking about improving macroeconomic environment and expectations for the GEL exchange rate appreciation. And these forecasts have justified. The environment has changed, including in term of inflows. And the main thing is that we have absolutely proper psychological expectations and GEL is a stable currency”, Finance Minister Nodar Khaduri noted.

Thus, the GEL exchange rate strengthens and the national bank needs to purchase more USD to maintain the exchange rate stability. For example, in March it was sufficient to purchase 5 million USD to curb the extreme surge of the exchange rate, while on May 20 the NBG had to purchase 40 million USD. The main thing is that the Georgian national currency be stable and the business and our citizens be able to plan their future.

By Merab Janiashvili
Economic Analyst
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