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“Georgia Will Move from -3.3% Deflation to Moderate Inflation starting this June” says NBG

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The FINANCIAL — Starting from February this year Georgia experienced sudden deflation which persisted for 4 months and reached its bottom in May -3.3.

 

The FINANCIAL — Starting from February this year Georgia experienced sudden deflation which persisted for 4 months and reached its bottom in May -3.3. 

 

Now as Archil Merstvirishvili, Vice Governor of National Bank of Georgia told to The FINANCIAL – annual inflation will start to pick up moderately from June this year and will stay low till the end of this year.

 

As parliamentary elections are approaching – NBG do not expects that increased spending will significantly affect inflation, although promises to promptly react with its monetary policies if risks to price stability emerge.

 

“From the peak inflation last year in May when it stood at 14.3% – we saw fast decline of an annual inflation that continued in 2012, were we went to deflation. The latter development is mainly the result of a base effect” Archil Merstvirishvili, Vice Governor of National Bank of Georgia believes.

Q. What role does remittances tourism and investments play on appreciation or depreciation of Georgian Lari (GEL) today? And can we refer today's Lari appreciation trend to one of these factors' change?

 

A. In Georgia we have floating exchange rate regime, which means that the rate is determined according to the supply and demand on the FX market. Thus foreign direct investments (FDI), remittances, income from tourism and various other factors like export and import, expectations of market participants – these all play a key role in determining the exchange rate of our currency against the other foreign currencies.

 

Net Inflow of foreign currency whether it's through FDI or from other sources will support Lari's appreciation.  However, whether Lari appreciate or depreciate, it all depends how the other factors change as well. Some of the major factors affecting the exchange rate are given in the balance of payments statistics that is published on the NBG website three month after the end of each quarter.

 

We should not forget that value of Lari is measured against other foreign currencies thus what happens on international markets and with our trade partners' economies is an important factor for our currency. For example the dollar depreciation which took place earlier supported appreciation of Lari. In addition Georgian population mainly looks at Lari-USD exchange rates; however USD is not the only currency which affects the Georgian economy. Only about 35% of our external trade is made in USD, the rest of currencies like Euro and Turkish Lira on 2nd and 3rd place respectively play an important role as well.

See also  Time Shifting 

 

Q. If a big investor comes in Georgia and converts bulk amount of dollars or other currency regularly – let's say every month – would it seriously alter the exchange rate of Lari?

 

A. "If a large sum of money gets converted, yes it will affect the exchange rate although this might be a short run effect only. "

Q. What amount of international reserves does NBG have today and how did its level change compared to previous years?

A. In May of 2012, the total amount of international reserves stood at 2.8 billion USD. This figure is actually twice as much as it was before the crisis in 2008. Just in 2011 level of international reserves has grown by 550 million USD.

Q. On the one hand appreciation of Lari can be positive as well as negative for different players in the economy i.e. good for importers whilst bad for exporters. What macro-economic changes do you see today and how does it relate to Georgian scenario?

A. As mentioned above, exchange rate of Lari is determined according to supply/demand on the FX market. Supply and demand are influenced both on the developments in the economy and on the international markets as well. As far as trade balance is concerned for it the so called "real effective exchange rate" is important and not "nominal exchange rate" of Lari vis-à-vis the dollar.

"Real effective interest rate" encompasses level of inflation in Georgia and its trade partners. The share of each country is weighed according to its contribution in total external trade turnover of Georgia. Currently the real effective interest rate is appreciated but due to the fact that we have lower inflation than our main trade partners have, the former is less appreciated than the nominal exchange rate.

See also  Time Shifting 

 

With today's circumstances – after the financial crisis of 2008 – Federal Reserve in USA started to lower interest rates, which are unprecedentedly low now, with the Quantitative Easing i.e. supplying additional USD liquidity to the market. The same approach was employed by the European Central Bank, by the Bank of England and by others. In addition to the recent sharp depreciation of the Euro caused by the European debt crisis and earlier we saw Turkish Lira's declining. In other words, most of our trade partner's currencies are weakened, that is translated to Gel's appreciation pressure.

Q. How long such situation will last and what effects can it have on Georgian economy?

 

A. It all depends on the development of events in the global economy and all attentions now is toward the Europe. As for the forecast of exchange rate, neither NBG nor any other country's central bank makes such forecasts (except of one's having fixed exchange rates system), as it is theoretically impossible to guess the direction of the exchange rate in the short run.

 

It's easier to make forecasts about exchange rates in long-run, let's say for the next 10 years. Due to the fact that Georgia's economy will grow faster than advanced economies it is expected that Lari will appreciate in the long run.

 

On the other hand short term volatility of exchange rate is quite common all over the world. Flexibility of the exchange rate is an important feature of the exchange rate since it reduces the impact of the shocks to the economy and by that higher long run growth is attainable.

 

If we look at other countries with floating exchange rates regimes and their currencies – we will see that short run volatility of those currencies are higher or similar to the Georgian Lari vis-à-vis the USD.

 

Insuring yourself from such volatility is easy through hedging i.e. we should try to have our income and expenditures in the same currency and by doing this exchange rate fluctuations won't affect us anymore.

 

 

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