On 28 January 2015, as a guest on Imedi TV, the former Prime Minister of Georgia, Bidzina Ivanishvili, declared that the depreciation of GEL will not hurt the population.FactCheck
took interest in the statement and verified its accuracy.
The GEL exchange rate has been dropping since November 2014. The trend of depreciation continued in January 2015 and the national currency exchange rate against USD was set at 2.0.Georgia pays for imported goods and services by using foreign currency, mostly USD. The share of imported goods in the total consumption of the Georgian population is 66%. Therefore, if GEL depreciates against USD, the revenue of importers decreases as they usually buy goods abroad in USD and sell those goods in Georgia in GEL. For instance, when the GEL exchange rate against USD was set at 1.7, an importer could have bought one kilogram sugar for USD 1 and sell it in Georgia for GEL 1.80 which guaranteed him GEL 0.1 profit per kilogram. However, when the exchange rate soars to 1.90, the importer cannot sell the sugar for GEL 1.80 if he had paid USD 1 for it. Therefore, the depreciation of GEL can possibly lead to higher prices on the local market. For instance, prices recently surged for 350 types of medicines. The importers of natural gas to Georgia (SOCAR and KazTransGaz) have been planning to increase the price of natural gas by 15 tetri
for commercial companies. The reason behind that decision was the depreciation of GEL.
However, the depreciation of the currency does not inevitably lead to higher prices for imported goods as the fluctuation of prices is hinged upon existing demand on the local market and the changes in the prices of goods purchased abroad.
According to the information of the National Bank, 61% of loans issued by commercial banks are in USD as compared to 39% of loans in GEL. This is one of the biggest problems of the depreciation of GEL. The majority of citizens receive their salaries in GEL and have loans in USD which means that the depreciation of GEL is worrisome. Considering the fact that GEL depreciated against USD by 35 points in the period of November 2013 to January 2015, anyone who has a loan in USD now has to pay GEL 35 more per USD 100.
It must be noted that commercial banks prefer to issue loans in USD as the dollar is the most widely used and stable currency, having a strong confidence everywhere. Additionally, commercial banks get their loans from foreign lenders in USD and, consequently, have a greater volume of USD reserves as compared to GEL (57% of deposits in commercial banks are in USD). Therefore, commercial banks are able to offer their customers more long-term loans with low interest rates in USD than in GEL. Apart from the loans, USD is the regular means of exchange when real estate and cars are traded in Georgia. This means that customers will need to pay more GEL to make these transactions provided GEL is depreciated.
One of the negative outcomes of the depreciation of GEL is the rise of the country’s foreign debt. Foreign debt accounts for 76% of the total government debt. At the end of October 2013 total foreign debt was USD 4.057 billion whilst the exchange rate of GEL against USD was at 1.67, meaning that foreign debt in GEL equalled 6.779 billion. At the end of December 2014 the government’s foreign debt reached USD 4.157 billion but as a result of the local currency depreciation, it rose to GEL 7.747 billion. The depreciation of GEL increased the country’s foreign debt by GEL 802 million. The service of the debt has to be done through the state budget and, therefore, it is a burden for Georgian taxpayers.
The significant fluctuation of the currency serves as an indicator of an unstable macroeconomic environment and makes the country less attractive for investments. Business prefers a stable exchange rate when currency risks are sharply reduced. This can be confirmed by the statements of businessmen, including Temur Chkonia, who stated that the future plans of his company largely depend upon a stable exchange rate of GEL.
A popular belief has it that a positive outcome of the depreciation of GEL can be the reduction of Georgia’s current account deficit as the plunging GEL exchange rate makes exports cheaper and imports more expensive. However, changes in the real exchange rate are far more important than the changes in the nominal exchange rate. The real exchange rate shows not only the currency exchange rates but the differences of the prices of goods in different countries. For example, if the depreciation of GEL is accompanied with high inflation in the country (prices of goods are on the rise) the increased prices will eventually waste the trade advantage obtained by the weak local currency.
Conclusion The depreciation of GEL has a negative impact upon the population. The share of import amounts to 66% in total consumption; therefore, importers’ expenses are increased and in most cases that is reflected on prices as well. Prices of some medicines have already increased. The price of natural gas might increase by 15 tetri
for commercial companies which will possibly lead to higher prices for other goods, including bread.
It must be noted that 61% of Georgians have their bank loans in USD whilst they get their income in GEL. The dropping currency exchange rate makes it harder for them to service their debts. The country’s total foreign debt increased by GEL 802 million, owing to the depreciation of GEL.
The rapid changes of a currency exchange rate raises the currency-associated risks for business owners, makes the country less attractive for investments and, consequently, arrests economic development.FactCheck concludes that Bidzina Ivanishvili’s statement: “The depreciation of GEL will not hurt the population,” is FALSE.