The FINANCIAL — The Ukrainian crisis and ensuing EU and U.S. sanctions against Russia are costing Georgia a reduction of export, tourism, FDI and remittances from its main economic partner countries. But while other regional currencies are regaining, Georgian Lari continues free fall which local government failed to stop.
Reducing trade deficit, staff cuts in governmental structures and tightening spending discipline have been named as measures that could be implemented to stop the ongoing devaluation of the Georgian Lari. During the last week the Georgian Lari has hit a new record low against the USD and equalled the level of 1999. Fitch Ratings even sees some room for further devaluation of the GEL.
The Lari has lost 30% of its value since November 2014. Last week it hit new records. Georgia’s national currency has again devalued against the Dollar. The National Bank of Georgia has set a new exchange rate, according to which, USD 1 costs GEL 2.3303 from 2 May. According to NBG, the Lari has devalued against the Euro too; EUR 1 costs GEL 2.6248.
To stabilize the GEL, Georgian businessman Temur Chkonia recommends implementing tough measures. “If we do not carry out the strictest of measures we will get into a very difficult situation. The optimization of management in state structures is important. It seems that too many people are working,” said Chkonia.
In his words, staff cuts, tightening spending discipline as well as on the income side should be implemented. He adds that the currency issue cannot be solved just with some questions.
“NBG alone cannot solve the problem. Moreover, spending national reserves may carry greater risks for the economy,” said Chkonia.
“When we hear that only NBG can regulate this problem, it is a big mistake. NBG can start spending reserves, spend the whole amount in just a day and find itself in a catastrophic situation,” the businessman added.
“The trade deficit will need to come down to reduce depreciation pressures on the Lari,” said Azim Sadikov, IMF Resident Representative in Georgia.
“In the short term, this means a reduction in imports, which we are already starting to see. Imports can be reduced faster by squeezing consumption and investment through tighter fiscal, monetary, or macro-prudential policies. Each of these tools has its pros and cons. We should be clear that there are trade-offs: tightening will likely depress the economy,” said Sadikov.
In Sadikov’s words, the depreciation of the GEL against the USD since late 2014 reflects a combination of external shocks that affected Georgia: 1) the strengthening of the US Dollar, and 2) the economic slowdown and currency devaluations in partner countries, which led to falling remittances and exports.
“Maintaining a floating Lari is in the best long-term development interest of Georgia. Therefore, we support NBG’s policy to allow the Lari to float, maintain adequate reserves, and remain focused on keeping inflation under control,” Sadikov added.
Devaluation of the Lari already caused a rise in the price of imported goods by over 15%. According to leading Georgian hypermarket chains, the ratio of food and other primary usage products of import to domestic production is 70/30. Domestic demand for many sorts of products is totally supplied from overseas. In addition, local manufacturers are importing raw materials, which means that the cost of locally-made products will also increase in line with the depreciated national currency.
The main victims of the currency devaluation have been borrowers that have bank responsibilities in a foreign currency. It has already been reflected in the portfolio of overdue loans. During the first quarter of 2015 the volume of overdue loans has increased by GEL 74 million.
As the Lari has fallen, the Government has had increasing criticism from the opposition with the United National Movement (UNM) parliamentary minority group blaming the economic policies of the Government, while the latter tends to blame mostly external factors for the GEL depreciation. UNM has been calling on the Government to give up imposing additional regulations and to cut income and value added taxes, as well as to scrap excise tax on fuel to stimulate economic growth in the longer term.
The Georgian PM, Irakli Gharibashvili, believes that the depreciation of the GEL is connected to external factors. The Prime Minister stated that the continuing problems are a reflection of the ongoing processes in the region. “We have to continue our economic growth and we will keep on doing everything for it,” said Gharibashvili.
Gharibashvili stated that he is satisfied with the work of the Government’s economic team.
With the currency crashing, tens of thousands of Georgians marched on 21 March in one of the biggest anti-government rallies of recent years, blaming the authorities for the economic crisis and worsening crime.
“The Lari is expected to fall as low as the environment will require: as long as Russia faces difficulties and the oil price is low (affecting Russia and Azerbaijan), downward pressures will remain. There is still some room for further devaluation, but also upside risks should the oil price trend upwards. The central Bank has intervened only modestly, providing some liquidity and shielding against short term fluctuations rather than trying to counteract the devaluation. We expect the continuation of this policy,” Vincent Forest, Associate Director, Global Sovereigns and Supranationals at Fitch Ratings, told The FINANCIAL.
“We do not necessarily view the depreciation of the Lari as a bad thing per se. The floating exchange rate regime provides a shock absorber, in that it maintains price competitiveness of exports and acts as a drag on imports,” said Forest.
“Stopping the devaluation would be a very difficult policy to pursue, and not necessarily effective either. Indeed, the devaluation is brought about by regional currency readjustments (notably the Russian Rouble, but also Azerbaijani, Armenian and Kazakh currencies), so trying to swim against the tide would prove very costly,” Forest told The FINANCIAL.