Larization in Action: the Good, the Bad and the Ugly

Larization in Action: the Good, the Bad and the Ugly

Larization in Action: the Good, the Bad and the Ugly

The FINANCIAL -- Three months have passed since the introduction of the new law forbidding entrepreneurs and companies from making service offers in currencies other than Lari (GEL). The business sector have already had the opportunity to deal with this new regulation so we asked them about the good and bad sides of the new law.

Exempt from the new limits are advertisements aimed exclusively at foreign customers; international transport; roaming services; certain insurance cases; intellectual property services; energy import/export; services provided by non-residents; residents dealing with non-residents; energy service provisions on occupied territories and fulfilling international duties. Exceptions are also allowed for banks and travel companies.

Rustavi Auto Market – Autopapa, is a company that has been operating since 2010. It sells around 5,000 cars a month. Evgeniy Ustinov, the Chief Executive Officer of Rustavi Auto Market, says that the new law has had a negative effect on business.

“When it comes to the law, I do not think that Georgia has to reinvent the wheel in its quest for economic growth. There are enough examples of countries achieving the said objective without interference of this kind, be it in Europe or Asia.

“In my opinion, it is definitely not the case of positive government interference. Instead of regulating the economy, this law undermines certain companies. Not only that, it makes the playing-field uneven for different entities, as there are sectors which are exempt from this rule. Individual entities kept their right to tag a price in foreign currencies, while companies and entrepreneurs are forbidden to do it.”

“When it comes to my personal experience, it is an overwhelmingly negative one – over 50% of our customers are foreigners, with the bulk made up of people from Azerbaijan, Ukraine, Armenia, Turkey, Iran etc. They often wonder why the price is indicated in Lari: it is confusing to them, as, unlike the Euro or Dollar, which are global currencies and their value is more or less well known, the Lari is not on the same pedestal,” said Ustinov.

“The adaptation process was associated with some expenses, as our IT team had to switch over to the new task of creating a handy system through which customers can convert currency, which was, by extension, associated with some costs. Our communication centre expenses have gone up as well, as the traffic has increased around 5 times, mainly due to confused foreign customers.”

“I can only speculate, as there are infinite variables when it comes to sales, however, my supposition is that the new law had a pretty severe effect on our sales all throughout this period. When people see the price tag, they are quick to assume that it is indicated in Dollars or Euros, which both cost a couple of times higher than Lari a piece. A foreigner might revisit the website, might see a certain car tagged at 10,000, assume the price is in dollars and never visit the country, thinking that prices have gone up and there is no bargain to be had locally any more, which not only takes a customer away from us, but also prevents them from spending money on local commodities while visiting, for example on a hotel stay.”

Nana Gabunia, owner of Print Georgia, says their website has not been available to the public for the last 3 months because of the new law. “Every day, the Lari exchange rate is changing dramatically, therefore, we have to change the price tags on a daily basis. The materials we buy for our production are all valued in Euros or Dollars, which is why we value our products and services in the aforementioned currencies,” Gabunia said.

“Evaluation of our products happens in foreign currencies, as the materials we buy are almost always imported. For example, German company Kohler’s expensive paper is sold in Euros, some other ingredients are priced in Dollars. Therefore, the price of a product, too, depends on these two currencies.

“Today, we have to spend more. One of our workers has to manually update prices every day, which is a new function he acquired within the company, so, naturally, we have to pay extra. We lose a lot of time daily. If before we could consistently display the price tag of an item, now we have to calculate our price every time a new order comes. We’ve been in this business for 14 years and we’ve had a lot of customers, but the problems presented by the new regulation did take a toll on our business. For example, in the past, when one Google-searched ‘Glass’ in Georgian, our website would be the first result that would come up. After the problems presented by the regulation wreaked havoc on our web platform, the website moved down to last place on the front page. Our customers are mainly Georgian, and are usually wine or dairy product-related business entities,” said Gabunia.

“Thankfully, our main line of work was not affected. New customers are not coming, as the prices are not indicated. It should be noted that in the past, we were the only printing company which consistently had pricing indicated on its products.”

Ketevan Pachulia, Public Relations Manager of AS Georgia, had a more forgiving view of the legislature, although, even in this case, she mentioned a very important detail – that of the inflated costs of apartments offered by her company.

“AS Georgia has conducted a sizable project on the Georgian market – Dirsi. The company also produces high quality building materials, provides industrial infrastructure construction services, etc. AS Georgia’s outlook on the Larization process is positive, as stabilization of the Lari will help create an improved business environment in Georgia. We also think that the 1st July regulation makes the customer safer when purchasing,” said Pachulia.

She believes that price setting has not become more difficult: “On the contrary, it has become more dynamic and flexible. It helps the company be more effective and is a right step towards development,” said Pachulia.

“We’ve had a 150% increase in sales this year. Around 70% of flats are already sold. At the same time, though, it should be mentioned that due to currency risks, the prices have spiked by 5-7%”, she added.

“The effect of Larization is largely psychological, the population starts thinking in terms of the national currency,” commented Lasha Labadze, Executive Director of ISET Policy Institute.

“The most important part of the Larization project is banking transaction changes, people now have to deal more in Lari when borrowing or saving. This substantially reduces risks for the financial sector and increases demand on the currency.”

“Prices are more stable in the long run. Instead of changing them daily, which is costly, a company will take currency fluctuation risks into account and act accordingly. In the short term, this might slightly inflate the prices.

“The regulation does not eliminate the currency risks, however, it transfers them from customers to dealers, who, most likely, know better how to evaluate and manage them,” Labadze said.

“This law is absurd and substantially reduces the freedom of Georgian citizens,” believes Alexander Rakviashvili, Dean of the School of Business Administration at Free University of Tbilisi.

“Instead of having the flexibility to choose among many currencies, the Government forces us into settling for Lari, the authority and reputation of which, to be honest, is not that high.

With this legislature, the Government expands its influence and reduces its own responsibility, which is neither good, nor efficient. Discussions about modifying the law are out of the question, I’d say the legislature just has to go.

A Georgian citizen should have the right to choose which currency to use, when and for what purpose. In actuality, this is what will push Georgia towards development, not any legislature pushed by the Government,” commented Rakviashvili, Free University.