The ‘free fall’ of the lari - what is happening to the Georgian currency? Four scenarios
For years the exchange rate of the Georgian national currency has been regularly dropping every fall.
However in 2020, due to the coronavirus pandemic, the tradition was broken — the lari’s rate began falling already in spring. On March 27 the official rate reached a record GEL 3.48 to 1 USD.
The National Bank managed to stabilise the situation with the help of currency interventions — in March, it sold USD 100 million from its reserves.
Add the fact that the country received considerable aid from donors, and in the period of April to August, the National Bank sold an additional USD 230 million. As a result, the panic subsided, the lari began getting stronger and in the summer grew stable at 3.06.
As it turned out, this was only temporarily. As the coronavirus spread further, the lari continued to devaluate.
What is the reason behind the fall of the national currency and is there a limit to it?
Reasons for the devaluation
● The main reason for lari’s depreciation is the drop of tourism virtually to zero.
From March to September, the country lost up to USD 2 billion in income due to tourism coming to a halt.
Lack of foreign tourists couldn’t be compensated for by the fact that Georgian citizens, deprived of the possibility to travel to other countries, spent their money on domestic tourism.
● Another reason were the negative expectations of the population caused by the number of people getting infected with COVID-19 — it became clear that the economic crisis would go on and the lari would continue its depreciation, so people began buying dollars again, which immediately affected the lari.
● Yet another important fact is that the currencies of Georgia’s two largest trade partners — Turkish lira and Russian ruble — began their depreciation back in September. (Since August 31, the lira’s devaluation has reached 4.5%, while for the ruble this figure is 3.1%. Depreciation of these two currencies exerts more pressure on lari)
● An additional factor is that due to the expenditure growth during the pandemic, the government is pumping much more lari into the economy. A part of this increased monetary aggregate reaches the currency market for currency purchases, thus increasing the demand for dollars and depreciating the lari.
● A considerable decrease of inflows from foreign sources is also a significant reason for the lari’s devaluation. It is from abroad that the currency intended to guarantee the stability of lari’s exchange rate comes into the country.
In the period from March to August Georgia’s import decreased by USD 1.1 billion, while export decreased by USD 387 million.
Besides, another important source of foreign income declined as well, namely, money transfers. From March to May migrants sent to Georgia USD 80 million less. (However money transfers started growing in June and increased by almost USD 100 million in June-August. One of the reasons for this increase lies in the fact that migrants didn’t manage to come home this year and sent the saved money to their families as money transfers).
Summing up, one can say that the decrease of foreign trade, money transfers, and tourism alone inflicts a loss of USD 800 million.
It is this deficiency that was partially compensated by the National Bank through selling USD 410 million in this period.
What will happen to the lari? Four possible scenarios
As a new tendency for lari’s fall was registered in September, the National Bank sold USD 40 million each on September 10 and 16. This intervention deferred lari’s downfall but didn’t stop it. On September 22, GEL exchange rate was 3.25 for one dollar.
Will the fall continue?
Expert of Transparency International Georgia, economist Beso Namchavadze speaks about four possible scenarios to stop the devaluation of the national currency:
1. The Georgian economy will drastically improve
– which is impossible in the conditions of the pandemic.
2. Significant improvement of external factors
– increase of export, investments, attracting tourists. This is also impossible, as in many countries the situation regarding the pandemic and economics is not much better than in Georgia
3. The National Bank must continue interventions
– this scenario is possible but can’t guarantee the lari’s stability as long as the currencies of our trade partners keep devaluating and the pressure on the lari keeps increasing. However the National Bank will try to not allow a significant depreciation of lari
4. The lari rate will reach a mark below which it won’t be able to devaluate.
– this is the most realistic scenario but the sad part is nobody knows where the rate fall will stop
It might be today’s rate just as well.
What this scenario means is that the fall of lari simultaneously denotes the increase of dollar. That is, if lari depreciates too much, dollar will become too expensive. And people won’t buy dollars that are too expensive for them. The demand for dollars will decrease, thus stopping the depreciation of lari.