Lari Depreciation

Government to Impose Market Regulations to Manage Depreciating Lari

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The Government of Georgia issued an official statement on November 15 regarding the instability of the Georgian lari (GEL). According to the statement, new market regulations will be proposed in order to soften the existing crisis in the country regarding the depreciation of the Georgian lari. The regulations aim to reduce the number of foreign loans and deposits, also known as “de-dolarization.” The government added that such an approach was unlikely to have negative effects on the economy, and that a reduction in next year’s State budget would contribute to the efficacy of the planned measures.

Statement of the Government’s Administration of Georgia:

“Government of Georgia has numerously made statements on the floating exchange rate of the national currency, which fluctuates on the grounds of domestic and external macroeconomic factors and expectations.

The temporary variation of the exchange rate is caused by the following key factors:

1. Significant depreciation of national currencies in neighboring, trade - partner countries

2. Increased outflow of foreign currency due to import volumes in recent months, which failed to re-balance against exports because of declining prices in the export market

3. Negative expectations towards the exchange rate of GEL, resulting from speculations made by various groups

In addition, it is worth noting that the consumer price index (CPI) is not increasing in parallel with the above-listed factors. Moreover, the National Statistics Office - GEOSTAT - has reported declining prices in recent months.

The most pressing problem faced by the population of Georgia is the excessive dollarization of the loan portfolio. Therefore, the Government (GOG) and National Bank of Georgia (NBG) plan to carry out a series of combined measures through consultations with the International Monetary Fund (IMF). Such measures include the following:

1. A key focus will be made on the acceleration of economic growth in the State Budget of the following year, thus increasing the portfolio of infrastructure projects. In addition, administrative expenditures will be reduced significantly and the state budget for 2017 will be aimed at strengthening the stable and sustainable fiscal environment. A similar approach will apply to the state budgets for following years

2. A Joint Action Plan will be announced in the coming days and it will inter alia entail specific steps towards a gradual reduction of the dollarization rate on the grounds of market economy principles.

As a result, economic growth will be accelerated both in the short and long-term perspective. The population of the country at large will no longer be dependent on the short-term fluctuation of the exchange rate led by negative externalities and the economic environment will become substantially stronger.

We are confident that measures included in the plan will also lead to positive expectations and the stability of the exchange rate.”

It is unknown so far  as to what kind of regulations are being discussed, however , llegedly this could be the reduction of a USD share in the loans portfolio, which by itself could give rise to a number of problems such as more difficult procedures for loan procurement, a lower number of loans in general and a growing number of loans from microfinance companies. According to analysts, these factors could also reduce economic growth.

According to the National Bank, as of October the credit portfolio of the banks was 16.5 billion GEL, out of which only 36.5% is nominated in GEL.

On November 11, the value of the Georgian Lari against the Dollar reached 2.49.

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