On 29 January 2015, the Minister of Finance of Georgia, Nodar Khaduri, stated that the State Budget of Georgia has not had any effect upon the exchange rate of GEL, neither at the end of 2014 nor at the beginning of 2015. In addition, on 15 January 2015, as a response to the question about the changes in the exchange rate of GEL, Nodar Khaduri said that the amount of money put into circulation by the State Budget of Georgia decreased both in December 2014 and January 2015. With this statement the Minister underlined that the budget spending has not caused GEL to depreciate.

The amount of GEL in the economy of the country has a significant influence upon the exchange rate of GEL as the exchange rate is formed by the ratio of GEL to USD. If the pace of increase of the amount of GEL is significantly higher than that of USD, the exchange rate of GEL depreciates. One of the sources of the increase of GEL in the economy of the country is a deficit spending by the State Budget of Georgia which means that the government spends more money than it gets in revenues in the same period.

The revenues of the State Budget of Georgia (including the sale of non-financial assets) amounted to GEL 846 million in December 2014. This is the amount of money that the state took out of the economy in December. The State Budget of Georgia spending (including the purchase of non-financial assets), on the other hand, amounted to GEL 1,100 million. This is the amount of GEL that the state “put into” the economy in December. As we can see, GEL 264 million more (1,100 - 846 = 264 million) was spent by the State Budget of Georgia in December 2014 than was actually received in revenues.

The National Bank of Georgia increased the refinancing loan by GEL 200 million in December 2014. This is a one-week loan which is given by the National Bank of Georgia to commercial banks to ensure short-term liquidity.

The increase in budget spending and the refinancing loan had a significant influence upon the exchange rate of GEL. The amount of national currency in circulation (the most liquid part of the money) increased by an unprecedented amount – GEL 241.5 million in December 2014 as compared to November of the same year. The amount of GEL in the economy has never increased by this kind of amount in one month in the past years. The amount of the so-called reserve money, which includes bank deposits along with the amount of cash in circulation, increased by GEL 450 million in December. The amount of reserve money increased by GEL 62 million in the first 11 months (January to November) of 2014 whilst in December it increased by GEL 450 million.

The State Budget of Georgia spending decreased significantly in January 2015. There was no deficit spending. The National Bank of Georgia decreased the amount for the refinancing loan from GEL 700 million to GEL 610 million by the end of January. As a result, the amount of GEL in the economy started to decrease. The amount of reserve money decreased by GEL 390 million whilst the amount of GEL in circulation decreased by GEL 197 million.

The amount of foreign currency reserves of the National Bank of Georgia increased by USD 94 million in December 2014 as compared to the previous month. The growth of foreign currency reserves was due to the State Budget of Georgia which attracted a total of USD 190 million worth of external grants and credits in December 2014. This significantly balanced the negative trade balance of the country and increased the foreign currency reserves. As the amount of foreign currency reserves increased due to the amount of attracted USD by intra-governmental conversions and the respective amount of GEL was put into circulation, this did not help to strengthen the national currency.

The members of the Government of Georgia believe that the depreciation of GEL was mainly due to the global strengthening of USD. USD increased with regard to many currencies in 2014 which was mainly due to the high rate of growth of the United States’ economy (it reached 5% in the third quarter of 2014) and the anti-deflation policy of the European Union (increase in the amount of EUR).

The chart below illustrates that both GEL and EUR were being strengthened with regard to USD from March 2010 to June 2011. After this, the exchange rates of both currencies changed in the opposite direction with regard to USD until September 2014. For example, when GEL depreciated at the end of 2013, USD was also being depreciated with regard to EUR. Also, when EUR depreciated significantly with regard to USD from July to September 2014, the exchange rate of GEL with regard to USD strengthened. There is little casual connection between the depreciation of GEL and EUR with regard to USD in December 2014 and January 2015. The effect is indirect – when the national currencies of Georgia’s trade partners are being depreciated, it worsens Georgia’s external trade and increases the negative trade balance which, therefore, contribute to the depreciation of GEL.

Chart 1:

 Exchange Rates of GEL and EUR with Regard to USD

The main reason for the depreciation of GEL in November and December of 2014 was the decrease in the amount of incoming USD in the country and the slowing down of economic growth. FactCheck wrote

about this issue earlier as well. Export from Georgia decreased by USD 168 million from November to December 2014 as compared to the same period of the previous year. Money transfers from abroad also decreased by USD 60 million.

The strengthening of the national currency is facilitated by the high rates of economic growth as the demand upon the national currency increases. In addition, it is important for economic growth to be based upon the increase in investments and not upon fiscal and monetary stimulators such as the deficit spending of the budget and the increase in the amount of the national currency in circulation. The average economic growth rate of Georgia decreased to 0.7% in November and December 2014. Deficit spending from the State Budget of Georgia and the growth of the refinancing loan became the main stimulators of the country’s economy.

From January 2015, the factor of the increased amount of GEL was added to the already existing factors of depreciation (decreased influx of USD, decrease in economic growth and the global strengthening of USD). This was mainly due to the deficit spending of the State Budget of Georgia. The Government of Georgia did not keep the promise voiced by the President of the National Bank of Georgia on 5 December 2014 and did not refrain from deficit spending. As a result, the official exchange rate of GEL with regard to USD was 2.06 by 28 January 2015.

Conclusion

Deficit spending from the State Budget of Georgia stopped after January 2015. The amount of the refinancing loan also decreased and the amount of GEL in the economy started to decrease as well. Despite this, the exchange rate of GEL continued to decrease. The extra amount of GEL 264 million released in the economy by the State Budget of Georgia in December 2014 had a negative influence upon the exchange rate of GEL. This was combined with the global strengthening of USD, the slowing down of economic growth and the decrease in the influx of USD. In the future, if external factors are not worsened, the decreased amount of GEL in the economy will facilitate the stability of the exchange rate of GEL.

Despite the fact that the depreciation of GEL is due to multiple factors, the statement of the Minister of Finance of Georgia that the budget spending has not caused GEL to depreciate is MOSTLY FALSE.