with respect to USD. According to the position of the Government of Georgia, the decline of GEL is due to the strengthening of USD with respect to other currencies and it has nothing to do with the state budget. Bidzina Ivanishvili stated the same position today.FactCheck
took interest in this issue and looked into it.
The Georgian currency has a floating exchange rate. This means that the exchange rate of GEL with respect to USD or any other currency is regulated according to demand and supply on GEL on currency markets. The exchange rate depreciates when the amount of GEL in the country increases faster than the amount of USD or when the amount of GEL increases only slightly whilst the amount of USD decreases.
We analysed the changes of various currencies of the world with respect to USD from June to November 2014.
Currency Rates with Respect to USD 1
It should be noted that USD has been strengthening with respect to the currencies given in the table for the last five months. The strengthening of USD in Georgia started only in November. Furthermore, whilst the majority of the currencies were depreciating in July and August 2014, the exchange rate of GEL strengthened with regard to USD. The exchange rate of GEL has been a bit shaky since September; however, a significant change was observed only on 21 November when the exchange rate of GEL to USD increased to 1.77. It reached 1.84 on 30 November whilst according to the 4 December data of the National Bank of Georgia, it increased yet again to 1.90.
In order to analyse the connection between the depreciation of GEL and the global strengthening of USD more comprehensively, we need to look into the situation of August 2014 in detail. By that time, the exchange rate of USD was already strengthening with respect to other currencies. However, it did not cause the depreciation of GEL at that time. Furthermore, due to the fast strengthening of GEL, the National Bank of Georgia was forced to purchase USD 120 million. The strengthening of GEL was due to the growth of the amount of USD in the country which was caused by the peak of the tourist season.In addition, GEL has depreciated not only with respect to USD but to Russian RUB, Ukrainian UAH and to the currencies of Georgia’s other major trade partners. For example, with regard to EUR it has depreciated by 14 tetri (6%), to GBP by 21 tetri (8%) and so on. This makes us think that the depreciation of GEL to USD by 14 tetri (8%)
in two weeks is not caused solely by the strengthening of USD.
We also analysed the position of the government that the state budget has nothing to do with the depreciation of GEL and that the foreign currency inflow in the budget are going as planned.
The Ministry of Finance of Georgia planned the foreign currency grants and external debts in the equivalent of GEL 753 million in 2014. A total of GEL 144 million was assigned to grants whilst GEL 1,036 to external debt. The Ministry exceeded its plan in the field of grants in the first ten months of 2014 and attracted an additional GEL 158 million which set the plan implementation at 109%. However, the implementation of the external debt is quite slow. Namely, the state took the equivalent of GEL 565 million as an external debt (54% of the annual plan) in the first ten months. According to the nine-month implementation report of the external debt, the country was short of GEL 62 million.
One of the biggest reasons for the depreciation of GEL is Georgia’s external trade balance which has significantly worsened as compared to the previous year. According to the data of the National Statistics Office of Georgia, the export of goods increased by 5% from January to October 2014 and amounted to USD 2,425 million whilst the import increased by 11% and reached USD 7,006 million. The higher increase of import as compared to export caused the external trade balance of Georgia to worsen. The deficit is USD 593 million more in the first ten months of 2014 than it was in the previous year. In total, the outflow from the country, in the process of external trade, was USD 4.6 billion more than the inflow. The reduction of the amount of USD in the country, on the other hand, causes GEL to depreciate.
A significant worsening in the field of export started from August 2014. The export of goods reduced by USD 69 million (8.4%) from August to October 2014 (the data of November are still unknown) as compared to the same period of the previous year. The trend will probably continue in November as well. Georgian export has not seen such a reduction since the economic crisis of 2009.
The trade balance of Georgia was deficient in the previous years as well which means that import was higher than export; however, the outflow of USD was balanced from other sources: trade in services, money transfers from abroad, foreign investments and credits.
Georgia has a positive balance in trade in services in recent years. As of today, we have the data of the first two quarters of 2014 and the balance is positive (USD 574 million); however, this is USD 59 million less than it was in the same period of the previous year (the reduction in the field of international transport, for example, is USD 33 million).
The amount of money transfers, which is a significant source of foreign currency for Georgia, reduced as well by USD 8.6 million. For example, a total of USD 1.5 billion was transferred to Georgia in 2013. A total of USD 1.2 billion has been transferred to Georgia in the first ten months of 2014.
Foreign investments have reduced by USD 135 million in the first half of 2014 (data of the recent months have not yet been published) as compared to the same period of 2013. The growth of portfolio investments by USD 317 million was outweighed by the reduction of direct investments by USD 55 million and a reduction of other finances (including the credits taken by the state) by USD 408 million.
As a result, the negative trade balance (outflow of USD) is not being compensated by the inflow of capital and the currency reserves of the country (USD reserves) are being reduced. Accordingly, the demand on USD is increasing whereas the amount of USD is reduced which causes the depreciation of GEL. Georgia’s foreign currency reserves have reduced by USD 153 million in the first ten months of 2014. This trend continues in November and December as well. The National Bank of Georgia was forced to sell USD 80 million in order to stop the depreciation of GEL.
As for the influence of the state budget upon the exchange rate of GEL, it should be pointed out that the budget spending causes a risk to the stability of GEL only if the spending is deficient, meaning that the budget takes more money from circulation than it spends. Georgia’s state budget deficit is equal to GEL 1,038 million in 2014. The deficit of the budget amounted to GEL 630 million, GEL 120 million of which was added to the budget balance which means that it was not put into circulation. However, the major problem here is the uneven distribution of the deficit on months. For example, the spending was not deficient in September whilst the deficit reached GEL 171 million in October. The data of November are still unknown; however, it is clear from the accounts of the National Bank of Georgia that the supply of GEL has not increased as much to cause the depreciation.
We had a different situation from October to December 2013 when GEL 630 million more was spent on incomes from the budget. This caused a sharp increase in the supply of GEL and its exchange rate depreciated. Based upon this experience and due to the fact that the spending part of the budget still falls short of the initial plan, there is an expectation in society that the government will do the same this year – spend a lot of money (if not, there will be a deficit in the spending part of the state budget). These expectations, which if realised will cause a further depreciation of GEL, are supported by certain statements of the Minister of Finance of Georgia. For example, Mr Khaduri stated in one of the interviews that the implementation of the 2014 state budget is not under risk.
USD has indeed strengthened with respect to other currencies of the world; however, stating this as a major reason for the depreciation of GEL is not correct. GEL has depreciated not only with respect to Russian RUB and Ukrainian UAH but to the currencies of Georgia’s other major trade partners as well. Additionally, the depreciation of GEL started at the end of November 2014 whilst USD has been strengthening globally since July.
The main reason for the depreciation of GEL is the reduction of the amount of USD in the country. The external trade balance has worsened by USD 593 million as compared to the previous year which has caused the exchange rate of GEL to drop. In addition, the inflow of foreign investments and credits has reduced by USD 135 million in the first half of 2014 as compared to the same period of the previous year. This trend probably continued to the end of November.Hence, FactCheck concludes that the position of the Government of Georgia, which explains the depreciation of GEL with external factors and tries to separate it from the problem of state budget implementation, is MOSTLY FALSE.