The FINANCIAL - GEL Stability is Likely to be Shaken Again

GEL Stability is Likely to be Shaken Again

GEL Stability is Likely to be Shaken Again

The FINANCIAL -- The Georgian Government is failing to assimilate the share of scheduled expenditure from the state budget for the second year in a row. This was the main reason for the significant devaluation of the national currency that occurred at the end of 2013.

A repetition of the previous year’s scenario remains a distinct possibility according to some experts and politician. Not meeting the planned budget allocations by the end of the year would insure GEL stability but result in a slump in the economy.

“GEL 4,042 million has been spent this year as of 8 July. This is 44% of the annual plan. The so-called non-financial assets of capital expenditure has been partially assimilated. It has been 40% assimilated. If budget expenditure is not distributed evenly over the remaining six months of the year, it may result in additional pressure on the exchange rate of the GEL, as it did in late 2013,” Irina Guruli, Programme Manager at Economic Policy Research Center (EPRC), told The FINANCIAL.

“The devaluation of the GEL at the end of 2013 was influenced by various economic factors. The slow adoption of the spending share of the budget in the first half of the year was one of the most significant factors. The main share of the expenditure was distributed over the remaining quarters. Specifically, 11% of the total amount was spent in the first quarter, 13.2% was spent in the second quarter, 24% - in the third quarter, and the remaining 52.1% - in the fourth quarter,” said Guruli.

“We are observing similar trends in the spending of this year’s budget,” she added.

“The measure of lending in the economy by banking institutions also influenced the devaluation of the GEL in 2013. It was characterized by a mass increase in the months of October to December. Specifically, from January to September 2013 the level of economic lending amounted to GEL 793 million, while in the fourth quarter of 2013 alone, it exceeded GEL 1 billion. Consequently, either the money supply increased, or the volume of GEL in circulation. Lending in the economy by commercial banks has increased by 20% during the first 6 months of 2014, in comparison with the same period of the previous year. This is mostly linked to the Acc policy and reduced interest rates,’ said Guruli.

Zurab Japaridze, one of the oppositional leader, MP, sees the danger of a repeat of 2013’s devaluation happening this year. “The GEL devaluation at the end of 2013 was caused by the fact that the Government was not spending money on infrastructural projects, presumably fearing that they would not manage to meet the social obligations they had. Then at the end of 2013 they spent a huge sum from the treasury. If we look at the budget expenditure of the current year we will observe the same trend. Therefore, it is possible that we might end up with the same picture at the end of 2014,” said Japaridze.

According to Japaridze, during a period of economic stagnation the Government is afraid that they might fail to meet their social obligations. “They are therefore saving money, mostly from the infrastructure budget. They then output the remaining funds at the end of the year, which devaluates the GEL and is the reason for the imbalance.”

Contrary to Guruli and Japaridze, Economist at Policy and Management Consulting Group (PMCG) Besik Namchavadze is optimistic that the Government and the National Bank will be more careful this year.

“The Government already has the experience of what a large amount of budget expenditure in the last quarter will cause. Accordingly, I think that a significant depreciation of the exchange rate is not going to happen. The Government and the National Bank will be more careful. In addition, as of June 2014 the National Bank has reserves of over USD 600 million less than it had in November 2013,” said Namchavadze.

The official international reserves of NBG have declined by USD 612 million from the end of November 2013 to the end of June 2014. The balance between national and foreign currencies impacts the depreciation and strengthening of the GEL. If the capacity of GEL in circulation increases faster than USD, the GEL depreciates. The outflow of USD was 229 million more than its inflow in the first quarter of 2014. During the fourth quarter of 2013 and first quarter of 2014 it totalled USD 481 million.

“The exchange rate has stabilized since February 2014. This means that we have a sufficient amount of foreign currency in accordance with demand. According to the current trend, the Government will fulfil 80% of its budget expenditure. If they try to fix this trend by the end of the year, then last year’s scenario will be repeated. However, I think that the Government will not do it again, especially when the USD reserves of the National Bank have been reduced. NBG will find the redemption of the surplus difficult,” said Namchavadze.

In his words, the increase of Georgian product export, attracting more foreign investment, and the entire assimilation of foreign aid and grants by the Government is instrumental in avoiding a further reduction of reserves. Namchavadze said that the Government has not managed to adequately utilize grants for one and a half years already.

“Only 46.5% was received under grant disbursement during the first five months. Just 34.7% of six months of foreign financial liabilities have been adopted in the first five months of 2014. This side of foreign financial liabilities refers to the acceptance of long-term preferential loans for infrastructure projects,” said Guruli, EPRC.

“The Ministry of Infrastructure spent just 49% of its scheduled budget in the first quarter of 2014. During the first five months of 2014 it has spent GEL 261 million less than the planned GEL 436 million. Infrastructural projects are mostly implemented by foreign funds. Accordingly, if we fail to assimilate them there will be a decreased inflow of USD. This is one of the reasons why the outflow has surpassed the inflow of foreign currency. Hence, the same error is being repeated in fundraising,” said Namchavadze.

“However, the Government will not be able to spend significant amounts of money at the end of the year. If they could spend money on infrastructure projects they would spend it now. In all likelihood the planned expenditure of the budget will not be fulfilled, which is bad. But the reduced budget expenditure will not put pressure on the exchange rate, which is the upside,” he said.

According to Japaridze, the policy of the Parliament of Georgia, PM and Ministry of Justice which was carried out has had the most negative impact on the Georgian economy.

Distinguishing concrete governmental structures by their achievements or failures, and consequent results on the economy, has been difficult for Namchavadze. “When we talk about macroeconomic consequences, the whole government team stands behind all of the results, both positive and negative,” Namchavadze told The FINANCIAL.