The FINANCIAL -- After more than two months of its devaluation the Georgian Lari has started steadying towards foreign currency, varying from 1.72-1.73 towards the USD down from 1.80.
However, the devaluation of the GEL will remain a focus as the cost of living for people of average income has risen by 3 percent. For the poor, whose major revenue is spent on food, it has risen by around 9%. The previous exchange rate of GEL towards USD of 1.65 is no longer expected to return. Experts predict the variation of the national currency to settle at around 1.70.
“The exchange rate has an impact on the prices of products, especially imported ones, but ultimately it is money supply that determines price level. As the money supply has increased, along with the depreciation of the exchange rate, it has had an impact on the prices of consumer products, whether imported or domestically manufactured. During the last three months (November-January) the Consumer Price Index (inflation rate) has increased by 3%. This is quite high for a three month period,” Besik Namchavadze, Economist at Policy and Management Consulting Group (PMCG), told The FINANCIAL.
According to Namchavadze, the prices of food and non-alcoholic beverages have increased by 9%. In his words, the cost of living for people of average income has risen by 3 percent. For the poor, whose major revenue is spent on food, it has risen by around 9%.
“The exchange rate change was a short-term process. Accordingly, talking about its devaluation and talks about the long-term impacts of this process are a little exaggerated. In general, the problem is a sharp and rapid change of the currency, whether it is depreciation or appreciation,” said Irina Guruli, Programme Manager at Economic Policy Research Center (EPRC).
“When the national currency devaluated from 1.66 to 1.80 the conditions of credit holders in GEL did not worsen. The impact was significant for those who had loans in USD. If creditors were paying USD 100 monthly as an interest rate that was equal to GEL 166, they later had to pay GEL 180, or GEL 14 more. It should be noted that in Georgia, credits issued in USD make up 63% of the total credit portfolio,” said Namchavadze.
The exchange rate of the national currency is formed by the mass ratio of GEL and USD. The mass of GEL has risen significantly, by 10% in November-January. The main reason for the growth of GEL mass significantly increased consolidated budget expenditures (GEL 2,788 million) in the fourth quarter of 2013. Out of it, GEL 659 million was deficient. It means that GEL 659 million more was spent in the economy, rather than budget revenue mobilization having occurred. It was the main factor of influence on the national currency. The pessimistic attitude of residents towards the national currency and increased conversion of GEL into USD was additional pressure. NBG intervened in the depreciation of the currency and sold 440 million worth of USD. This way, the National Bank withdrew excess mass of GEL which pushed the exchange rate. In addition, the state budget stopped influencing money supply. As a result the process turned around and the GEL started steadying.
“During 2013 the national currency in circulation increased by 34%, compared to the just 18% during 2012,” said Guruli, EPRC.
In addition, Avtandil Silagadze, Doctor of Economic Science at TSU, blamed NBG for the currency devaluation. He said that the policy was improperly conducted by NBG during this period. “The National Bank had sufficient reserves, which it started selling recently. As a result, the rate started decreasing. However, NBG could make it in time. The fear factor has encouraged those who had reserves in the national currency to purchase USD ensuring its further devaluation. In accordance the demand for USD has increased further.”
“Currency risk refers to the category of those who have taken out a loan in USD while their income is in GEL. It should be noted that the high degree of dollarization in the country (60%) means that there is a higher credit risk for the population. A similar incident happened in 2008, when for five days the exchange rate depreciated significantly. For example, if a monthly interest payment is USD 1,000, while the income is in GEL, the borrower would need about GEL 1,670 in November 2013 and GEL 1,780 in February 2014. So the difference is GEL 110 or more,” said Guruli.
“For Georgia, as a country dependent on import, devaluation of the national currency causes product price growth. Theoretically, exporters benefit from it. In our case, the negative impact of increased product prices exceeds exporters’ benefits,” she added.
“The depreciation of the GEL is unfavourable for importers. Due to it they increase product prices, which cause a decrease of volume of import and decline of importers’ revenue. Exporters, in contrast, can demand fewer dollars and sell more, as their income in GEL will be the same or even more,” said Namchavadze, PMCG.
Experts also talked about the negative impact of GEL devaluation on investors. “Devaluation of the national currency in the short term may have a positive impact on FDI inflows. But in a long-term prospect the changing currency and uncertainty reduces investor interest in the country,” said Guruli.
“Over the last two weeks the GEL has started steadying. I think the equilibrium rate will stop near 1.70. However, it does not mean that fluctuation will no longer continue. It is a floating rate regime in Georgia, not a fixed one. If there will not be any foreign or domestic economic shocks then the Georgian Government can maintain the stability of the GEL with the combination of a monetary and fiscal policy,” said Namchavadze.
“In the event of adequate actions of the National Bank, all conditions exist to stably maintain the exchange rate at around 1.70 towards USD. Moreover, FDI volume is expected to be much more this year, the higher rate of economic growth is projected to be at least 5% and remittances will continue. So, there are all these conditions to avoid unexpected changes of the national currency,” said Silagadze, TSU.
“Changes in the exchange rate may have alarmed and confused the public. However, officials of the central bank have said that at this time stabilization is expected. According to them, all of the hindering factors have been removed. The recent tendency suggests that a steadying of the GEL has started, but it may not see a return of the old index and may instead become fixed at a new point,” Guruli, EPRC, told The FINANCIAL.