The “AYFB”: “the National Bank of Georgia doesn’t use it’s mechanisms for strengthening GEL exchange rate

The Vice-president of the non-governmental organization the “Association of Young Financiers and Businessmen” – AYFB, Giorgi Kapanadze , arranged a briefing at the “Reportiori” press-club evaluating the policy of the National Bank of Georgia. According to him, the National Bank has at least 5 more instruments, apart from the monetary interventions, to influence monetary policy and exchange rate.

According to him, the criticism against NBG has emerged at an initial stage of GEL devaluation. Different experts and analysts claimed, that the delay and inadequate volume of USD sale was the main mistake of the National Bank. The National Bank accordingly responded only to this criticism and in support of its arguments even “quoted” international organizations.

“Every step made by the National Bank is directly or indirectly reflected on GEL exchange rate changes. We have discussed other instruments of NBG in addition to the monetary interventions and estimated , if submission of other measures on behalf of the National Bank could have “stopped” devaluation of Georgian Lari. “ – stated Kapanadze.

According to the Vice-president of the “AYFB” , the organization discussed opportunities and practical activities of the National Bank in record of GEL devaluation .

Kapanadze focused on the 5 most important instruments, that could supposedly strengthened GEL exchange rate sustainability.

Refinancing loans - according to Kapanadze, balance of the refinancing loans increased by 36 million GEL and for the end of the year it amounted 400 million GEL . In 2014, the balance has increased from 400 million to 712 million GEL. For the current year, in the light of the monetary crisis in the country, it has exceeded 1 billion GEL.

Certificates of Deposit - “It represents an instrument of NBG by which the money is, to put it simply- given or taken away from the commercial banks. According to the appraisal of the “AYFB”, in this respect as well, the National Bank is focused on the money supply. In particular, till the first half of 2013, the volume of the Certificates of Deposit was constantly increasing, meaning, the National Bank borrowed GEL from the commercial banks. The maximum volume was recorded for the end of the second quarter of 2013 - 850 million GEL. Since then, the volume of the Certificates of Deposits are constantly decreasing. And for May 7, it has amounted 415 million GEL. In the circumstances of the foreign currency crisis in the country, NBG is still returning loans to the commercial banks in GEL . Obviously, no one is going to claim that NBG should not return loans to the commercial banks, but more flexible Certificate policy should be implemented.

Both above mentioned instruments may be united into one - the National Bank’s loans to the Commercial Banks. If in 2013, NBG owed commercial banks 690 million GEL, today, commercial banks owe NBG 615 million GEL. Meaning, NBG provided 1,3 billion GEL for the commercial banks using debt instrument, in particular, increase in the money supply was recorded exactly during the sharp drop of GEL exchange rate.”- stated Giorgi Kapanadze.
Minimum Reserve Requirements – according to Kapanadze, in addition to above mentioned instruments, there are other mechanisms, by which NBG has opportunity to influence the exchange rate of GEL, however, it still doesn’t use them. It can positively influence exchange rate change, by both - tightening or softening the Monetary Policy.

“Banks reserve in the National Bank of Georgia 15 USD out of every attracted 100 USD - in case of GEL, every 10 GEL out of 100 GEL. The National Bank can lower reserve requirement for the foreign currency and release “blocked” Dollars, or increase minimum reserve requirement for GEL and “block” more GEL. Both measures would have positive impact on the exchange rate of GEL” - states the Vice-president of the “AYFB”.

Monetary Policy Rate – “is one of the main instruments by which the National Bank influences the price of the money; it can increase or decrease money price by means of the GEL interest rate raise or fall.

Lately, the National Bank has announced the tightening of the Monetary Policy increasing monetary policy rate from 4 to 5 %, however, if we evaluate it comprehensively, the Monetary Policy is not in fact tightened , but the soft Monetary Policy is just being maintained. The inflation rate is 2 times less than planned, the Monetary Fund is broadcasting 3 % increase of the inflation till the end of the year, meaning, inflation rate is quite low because of what, the National Bank of Georgia tries to reach the target rate of inflation, which it has repeatedly stated. When inflation rate is law, accordingly the Monetary Policy is soft; soft Monetary Policy leads to the cheaper GEL. Such tendency is clear in the light of the last 7 years statistics. Softening Monetary Policy has been followed by GEL devaluation, and the tightening – by strengthening of the exchange rate of GEL.

Implementation of the Soft Monetary Policy is explained on behalf of the National Bank for the maintenance of the competitiveness of the local industry and promotion of the economy, as if, there was a low level of dollarization in the country and the damage caused by devaluation of GEL - insignificant. Of course, local industry is promoted by devaluation of the national currency, but, yet, even these local entrepreneurs are much more affected by the fact, that their loans are taken in Dollar and it becomes more and more difficult for them to pay.”- stated Giorgi Kapanadze.

According to the appraisal provided by the “Association of Young Financiers and Businessmen”, the National Bank possesses relevant mechanisms to strengthen GEL exchange rate, but refrains from using them in order not to affect economic growth. Yet, the “AYFB” beliebes, that for now, it is much more important to strengthen GEL, than focus on the economic growth. In such case, less negative perspective should be chosen out of two negative perspectives.
Is it possible to truly stop GEL devaluation? Kapanadze believes, that there are sufficient grounds for optimism in this regard.

What is able to stop GEL?

According to the Young Financiers, at the current stage, it is more real to discuss the issue of ceasing devaluation of the Georgian Lari, then strengthening it. If, neither the National Bank and nor the Government intervene in the process, the process will stop devaluation on it’s own.

The Vice-president of the “AYFB” highlighted several important factors in this record:

1) stop import decline rate ; 2) stop decline rate of visitors (in April a slight increase was observed); 3) signs of stabilization in terms of the money transfers; 4) the weakening dollar on the international market; 5) certain volume increase of the oil price. Therefore, if in the end of the last year, the reduction in record of the dollar inflow and decline in outflow was recorded, for now, the outflow of the currency is being reduced and the inflow stopped to continue reduction.”- Stated Kapanadze.

According to the appraisal of the “Association of Young Financiers and Businessmen”, the National Bank of Georgia is able to influence official exchange rate of GEL, but it doesn’t act. It doesn’t truly tighten Monetary Policy and if on the one hand it increases refinancing rates, on the other hand it maintains and deepens soft Monetary Policy by means of all the other mechanisms – giving money to the commercial banks. If relevant measures are not taken in order to strengthen GEL, economic processes will be balanced so, that GEL didn’t continue further devaluation.