The FINANCIAL — The Georgian Lari (GEL) dropped by 1% last week, reaching an exchange rate of 1.7064 against the USD. Demand for USD during the Foreign Exchange Auction was three times higher than usual.
On January 15, 2010, the National Bank of Georgia sold 10,000,000 USD. This is the highest demand since August 7, 2009, when 10 million USD was sold at a rate of 1.6759 GEL for 1 USD. NBG said that further changes of the GEL against the USD will not be fixed in short term perspectives. Such high demand for the USD makes depositors cautious about keeping money in GEL.
A sharp decrease of the GEL rate was observed on November 7, 2008, when the GEL dropped 25 points in just a day from 1 GEL – 1.40 USD to GEL-/1.65 USD. Demand from commercial banks on trading at the Interbank Currency Exchange was 31 million USD. Once the first operation at 270,000 USD was over, the ICE suddenly stopped trading, citing technical reasons, malfunctioning of the computer networks, as the reason. Such a move caused panic with banks and customers. ATMs were quickly emptied. Three days later, on Monday November 10, the NBG Acting President David Amaghlobeli said that everything had been predetermined and planned.
“The dynamic of the GEL towards the USD fixed last week was affected by short-term factors,” an NBG representative wrote in answer to The FINANCIAL’s questions.
“As for the factors that determine the exchange rate of national currencies in the long term, they have not changed.”
“The official GEL exchange rate is determined by the correlation of demand and supply from the commercial bank and their customers. Besides that the demand and supply for foreign currency is determined by different factors, like foreign investments, export-import, money transfers and so on,” NBG says.
George Bakradze, an expert in economy, says the main reason for devaluation of the GEL against the USD was the low inflow of foreign currency in the country, coupled with increased demand for the USD, mainly due to political risks.
“Although, due to the drop in imports, the increase in demand was not particularly high,” says Bakradze.
Bakradze thinks that the official GEL exchange rate in 2010 will be characterized by the same dynamics as in 2009. “It will be mostly stable, although on the average the GEL might depreciate slightly during the year,” he says.
“I think that along with the decrease in political and other risks the FDI volumes will go up, increasing the supply of USD, whereas on the other hand, we might have an increase in imports, pushing up the demand for foreign currency, and on the average these two factors will cancel each other out, thus resulting in the relative stability of the GEL,” Bakradze believes.
“Since May 2009 the Tbilisi InterBank Foreign Exchange was replaced by the foreign exchange auctions (established earlier, in March 2009), thus significantly reducing the perception that NBG artificially manages the exchange rate. So, particularly after introducing foreign exchange auctions, I don’t think that NBG will have to involve large resources to keep the rate stable – the market mechanisms will work on their own. I also don’t think that NBG should necessarily keep the exchange rate stable – unless there is a threat of large-scale swings in it,” Bakradze says.
As Bakradze says the volume of international reserves of NBG at the end of 2009 was 2.110 billion USD out of which 1.890 billion USD was foreign currency reserves.
Akaki Tavadze, teacher of Free University, says that it is not correct to talk about devaluation of the GEL as the national currency was changed by only 1% against the USD which is not significant.
“If we compare the GEL with other foreign currencies we will see that the GEL is one of the most stable currencies. As we see NBG does not consider this fact alarming,” Tavadze says.
Tavadze predicts that the GEL will continue devaluating against the USD but will be maintained in creeping diapason.
“As it is just the beginning of the first quarter it is too early to make prognoses. If the governors’ of NBG are not replaced I do not think that the stability of the GEL will be under question,” he adds.
“Actually for Georgia what would be more harmful is further changes of the USD. Georgia is over-dependent on the USD, while the stability of the USD is under question,” Tavadze tells.
Tavadze underlines the capacity of NBG reserves and monetary credit policy as the main factors that will determine further stability of the GEL. “The main share of the consumer market is dependent on import. So the price increase of gas and other products in the world will have a serious impact on the local economy. Some indirect effect will be caused by the political situation in Georgia. Local elections will be followed by the distribution of different products for the population for free. This will raise the risk of inflation,” he declares.
Tavadze notes that it would be useless to spend the reserves of NBG in the same volume as previously, as the sources of its supplement have reduced.
“The fact is that changes of the exchange rate will affect prices. Also in Georgia some market directions are monopolized (like the pharmaceutical market), so the reason for price increase might not only be economical. Hence expectation of inflation is high. The fact is that in Georgia prices change only after devaluation of GEL and do not decrease after its raise. But still, as was released by the resolution of the Georgian parliament’s monetary-credit and currency policy, the main focus will be on keeping the stability of prices. This makes us optimistic. NBG keeps lots of instruments in place in order to maintain the volume of inflation at around the stated 6%,” Tavadze says.
“It was not a fixed huge scale devaluation of the GEL against the USD but the fact is that pre New Year spending should logically cause a strengthening of the GEL, as consumption is being made in the national currency. But it can be explained by customers’ fear about further economical instability and also the main reason is that the population is still focused on saving, which is directly connected with foreign currencies. The future is still uncertain. 2010 will be a more difficult year for small countries,” says Akaki Kheladze, Doctor of Graduate Studies at Caucasus University (CU).
Kheladze also believes that further devaluation of GEL will not happen.
“The existing trend of saving in foreign currencies will slow down and people will start spending money instead. Besides this Georgian officials are focused on encouraging commercial banks to increase crediting. After this the GEL will not continue to devaluate. We should be optimistic that customers will enhance spending capacity. Perhaps the GEL will drop against the USD but it will not be in serious figures,” he notes.
Kheladze says that customer focus on saving will continue for some time but after going past the saved margin they will start spending again. “We can say the same for commercial banks. When they reach enough saved reserves they will become more active in crediting and this will encourage the entire economy,” he notes.
“If we consider the responsibility of financial institutes, NBG and its officials should be more cautious in making correct steps in order to keep the stability of the GEL and avoid further devaluation of the GEL.”
“Further devaluation of the GEL will harm the total economical emergence from the global recession. This will first of all cause increased prices. But another reason is that if companies increase prices their revenue will reduce further, as currently people are continuing to shorten their spending capacity,” Kheladze says.
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