The government’s announced ‘Larization’ program has taken its effect since 2017. What is going to change?
What does ‘Larization’ imply?
This is a process that will significantly increase the role of the Georgian national currency-Lari in country’s economy. This will, first of all, be reflected on loans. Banks will mostly issue loans in Lari.
Why do we need Larization?
The government’s argument is as follows: foreign currency exchange rate is constantly changing. So, in order to minimize the risks and not to be dependent on exchange rate fluctuations, as well as not to constantly complain that we will have to pay more to the bank next month, the loans in Lari should be more risk-free and prognosticated, rather than in dollars.
How is the government going to increase the national currency role?
- The loans issued in US dollars will be converted into Lari (larization) and the mortgage loans will be subsidized;
- Restrictions will be set on taking loans in foreign currency;
- Under the law, pricing of goods and services will be mandatory in Lari
These are the steps that the government is going to take. Let’s consider them one at a time:
Loan conversion into Lari and mortgage subsidies
Starting from January 17, 2017, the government will provide one-time mortgage subsidies. His implies as follows: the government will pay certain amount from the budget and help people cover their loans. Though, to be eligible for subsidy, you should meet certain criteria:
if you are a private person and your mortgage loan: a) doesn’t exceed US$40,000 b) if your loan was issued before January 1, 2015; c) if your annual income doesn’t exceed GEL100,000 (as of 2015), you can apply to the bank and benefit from the government’s program.
I meet all the aforesaid criteria, so I will be allocated budget funds to cover part of my loan?!Great!
Come on, do you really believe such things ?! No one is going to give you money directly. What will actually happen, is: a loan that was once issued to you in US dollars will be converted into Lari, but at a preferential exchange rate. For example, if you decide to convert your loan into Lari on February 10 and the US dollar exchange rate on this day makes US$1/GEL 2,60, under this rate, it will be GEL0, 20 less for you. In other words, your loan will be converted at GEL2,40 rate. The government will reimburse that GEL0,20 difference to the bank.
And will the interest rate remain the same? In other words, if I, let’s say, took US$30,000 bank loan at 7% interest rate in 2014, will the interest rate be the same in case of loan conversion into Lari?
In case of loan conversion into Lari, the interest rate is likely to increase. How much it will increase depends on a particular bank, as well as on a loan recipient. As of today, the interest rate for mortgage loans issued in US dollars makes about 10%. In case of Larization, there will be higher interest rate. JAMnews interviewed several individuals, whom the government’s subsidy program concerned. Some of them said, the loan converted into Lari turned to be more expensive and therefore they refused to benefit from this program.
According to Zurab Gvasalia, the President of the Georgian Banks Association, 8% of potential beneficiaries took advantage of the program the very first day it was launched. The aforesaid subsidy will apply to approximately 33,000 loans and one can benefit from it for the period of 2 months. So, it’s up to you to decide, whether to make use of it or not.
I’ve received SMS from bank, that read: ‘The National Bank’s refinancing rate has been increased by 0,25 base points since January 25. Please, take note of this change.’ What does it mean and what should I take note of?
That’s not a good news for you. Increase in refinancing rate implies that part of the loans issued in Lari will raise in value. If you have ‘a variable-rate’ loan, i.e. it is tied to refinancing rate, then you will have to pay more.
The refinancing rate depends on the economic situation in the country. The National Bank closely watches the developments in the country and once it sees that there is a high risk of inflation, it increases the refinancing rate to minimize that risk.
More likely than not, the refinancing rate will be increased (presumably in March) by another 0,25% base points and will reach 7%.
And what does a restriction on issue of foreign currency loans mean? Won’t I be able to take a loan in US dollars?
No, you won’t be able to take a loan either in US dollars, Euro or Kuwaiti Dinar, unless you are going to take a loan that exceeds GEL100,000. In this case, a loan can be issued in foreign currency.
The other day, an expert was saying on TV, that it was more advantageous to keep your deposit in Lari. He seemed to be quite an intelligent man, I should probably trust him
No doubt, he was a clever man, though it’s better to rely on logic. It’s an ultimate truth: you should save your money in the currency that is safer and more reliable. According to the statistics, over 90% of natural and legal persons’ long-term deposits are placed in US dollars and Euros. It means that the national currency has a very low confidence rate in the population.
Will my foreign currency deposit and saving be converted into Lari?
No, certainly not. Nothing will be converted into Lari forcefully and by default, unless you want it to be converted.
What does pricing in Lari mean? The prices are already in Lari, aren’t they?
Yes, purchase and sale in Georgia’s retail facilities is done in Lari. You couldn’t buy bread or butter in a store with dollars before, equally as you won’t buy it in future. However, when the matter concerns real estate and valuable items, the prices are given either in USdollars or Euro, with few exceptions. If you visit a buy&sale website, the prices for almost everything, be it a house for rent or an antique chest of drawers, as well as those for certain services, are indicated in US dollars. That’s exactly what is going to be banned under the new regulation. A tried and tested method that has been applied until recently, i.e. pricing real estate for sale in U.S. dollars, will be regarded as a legal violation. This regulation will take its effect on July 1, 2017.
Should I indicate prices in Lari on the international websites, like, for example, airbnb (an online marketplace and homestay network enabling people to list or rent short-term lodging in residential properties) Will I be arrested if I don’t do that?
Of course, you won’t be arrested for that. But there are substantial fines envisaged for such a violation: a natural person will be imposed GEL500, whereas a legal person- GEL2,000. Sanctions will be also imposed in case of violation of the rules of advertising sales of goods and services.
The amended law doesn’t provide for any exceptions. So, if the current wording of the law is maintained, its effect will extend to the international websites as well. It’s yet unclear, what should a person do, in case the website has no Lari pricing option. And such cases are quite frequent. Despite a wide range of currencies, Georgian Lari still can’t be ‘identified’ on Airbnb website. Consequently, prices are set in foreign currency. Given today’s circumstances, the aforesaid act will be considered as a legal violation starting from July 1. This dilemma doesn’t just concerns the Airbnb website, but it is potentially broader problem.
The government’s approved decree will take its effect in 5 months. So, let’s hope that the situation will clear up by that time. Some experts assume that this type of activity could be regarded as foreign trade and be subject to certain allowances, which will remove this problem from the agenda.
This will certainly create some discomfort, but if it’s really going to help Lari and country’s economy, it can’t be helped, we will have to put up with it. It will really help, won’t it?
Well, what can I say. The government and experts supporting the Larization process believe that implementation of this program will help protect the population against the risks related to the exchange rate fluctuations. And also, in their opinion, the Larization process will consolidate the national currency – a demand for Lari will increase and people will depend less on the U.S. dollar.
However, a considerable part of economists doesn’t share such optimistic projections. In the opinion, any artificial interference in the economy is always dangerous and can be counterproductive. They believe that artificial ‘pegging’ of the U.S dollar exchange rate and people’s compulsion to take loans in Lari won’t be efficient and will affect country’s economy. Taking loans in US dollars is a natural process, since people rely more on hard currencies – the government’s opponents believe.
Some economists also regard as unfair the government’s initiative to subsidize the mortgage loans and make taxpayers help some citizens cover their loans. Under this system, a low-income citizen, who has never taken any loan and probably has no apartment of his own, should help a person, who has taken a bank loan to buy, let’s say, a costly apartment in the city center.