The national currency of Georgia, the Lari (GEL), depreciated by 24% with respect to the U.S. Dollar (USD) in the last four months, from November 2014 to March 2015. Even members of the Georgian government referred to such a depreciation of the currency as a “currency crisis.”
The dollarization of Georgia’s economy is very high -- therefore the depreciation of the GEL compared to the USD strongly affects various economic processes and public welfare.
Loans in USD account for 61% of the loans disbursed by the banking sector in Georgia. The volume of overdue loans increased by 43 million GEL (17%) in January 2015, with 32.5 million GEL falling on loans issued in USD. Debtors now find it difficult to serve their liabilities since their loans are in USD, whereas their income is in GEL. To mitigate the impact of the currency crisis, individuals and legal persons began to transfer the loans from USD to GEL. However, this process is accompanied by a tightened monetary policy that causes the interest rates of GEL loans to increase.
Real estate and cars are traded in USD in Georgia, as people trust USD more than GEL when it comes to long-term assets sales. As the main income of the population is in GEL, the depreciation of the exchange rate led to a decrease in real estate and car sales.
Product and service imports in Georgia constitute 65% of the GDP and 70% of domestic consumption. In January-February 2015, the inflation rate (0.4%) was not high, however since March the GEL exchange rate depreciation has begun to reflect on imported products. According to unofficial data, the prices of imported products grew by at least 10%. The price of natural gas was supposed to increase for legal entities in March 2015, however the government decided to partially subsidize natural gas or two months, delaying the price increase until May. These subsidies will cost the government 15 million GEL.
Foreign debt accounts for 73% (USD 4.1 billion) of Georgia’s foreign debt. Therefore, the GEL depreciation increases the burden of the foreign debt. The state foreign debt of Georgia in USD did not increase from November 2014 to the end of February 2015, but the state foreign debt in GEL increased by 1.4 billion GEL, and amounted to 30% of the GDP due to the currency depreciation. The state budget income is in GEL, therefore handling foreign debt requires the purchase of USD. As the GEL depreciates, the foreign debt burden increases in direct proportion with the depreciation.
Graph 1. Georgia’s State Foreign Debt
Data Source: Ministry of Finance of Georgia
Apart from this, the extreme fluctuations in the national currency exchange rate led to an increase in currency risks that negatively affects the country’s macroeconomic environment and puts the inflow of investments under threat. It is also noteworthy that to stop the GEL exchange rate depreciation, the reserves of the National Bank of Georgia were cut by 200 million USD. The decrease in reserves negatively affects the macroeconomic stability of the country as well. Moreover, the tightened monetary policy, aimed at stopping the exchange rate depreciation and inflation, negatively affects Georgia’s economic growth rate, which decreased to 0.5% in January 2015. The government decreased the 2015 economic growth forecast from 5% to 2%.
Graph 2. Official Foreign Currency Reserves of the National Bank of Georgia
To sum up: The GEL’s depreciation increased inflation, made the handling of loans of individuals, legal persons, as well as state foreign debt more expensive. In addition, it shrank the general population’s incomes and harmed macroeconomic stability. The government called it a “currency crisis” and started to develop a plan for overcoming the crisis that involves shrinking state expenditures, accelerating privatization, encouraging export, and improving the investment environment in the coming months.