The FINANCIAL — In June 2011, the Khachapuri Index continued to decline, reaching the seasonal bottom of 2.72 GEL (significantly below the seasonal maximum of 3.49GEL in December 2010).
Still, a year-on-year comparison shows that Khachapuri is actually getting more expensive. In June 2011, the cost of Khachapuri increased by 20.4% compared with June of last year (from 2.26 to 2.72 GEL). It also increased when measured in foreign currency (by 15% and 35% if measured in Euro and USD, respectively). Thus, Khachapuri is getting more expensive for local consumers, whether they earn in GEL or hard currency. Interestingly enough, those consumers who income is pegged to the USD suffer the most. This is happening because the nominal exchange rate of GEL vs. USD and Euro is not depreciating in line with inflation (it actually appreciated with respect to the USD). Local prices, including wages, continued to increase (year-on-year CPI inflation reached 10% in June 2011) whereas the average exchange rate of the GEL (against Euro and USD) during the same period did not change significantly.
Economics lesson of the week: exchange rate dynamics and Georgia’s external trade balance
Like any other good, foreign currency can be bought and sold. Importers need foreign currency in order to purchase goods produced abroad. The opposite is true of exporters: they sell foreign currency they earn abroad in order to cover local expenses. If imports exceed exports, one can expect the demand for foreign currency to exceed supply, causing local currency to depreciate. One would think that this should be happening in Georgia. During the past several years, Georgia has been importing much more than exporting. Moreover, this gap (“trade balance deficit”) has been steadily increasing, reaching almost USD 2bln in 2008. In the first 5 months of 2011 , Georgia’s imports exceeded exports by more than USD 1.6bln! Contrary to what one could expect, however, this “excess demand” for foreign currency did not cause the Lari to depreciate because imports and exports are not the only factors determining demand and supply in the foreign exchange market. Georgia’s foreign exchange market is supplied with foreign currency through many other channels, in addition to exports: tourism, remittances from Georgians abroad, foreign direct investment and foreign aid. Clearly, the combined impact of these channels has been more than offsetting the negative trade balance of Georgia, causing GEL to appreciate rather than depreciate.
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