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The Minister of Energy of Georgia, Kakha Kaladze, stated that the depreciation of Georgia’s national currency is a major challenge for the Government of Georgia.  He pointed out that the Central Banks in Azerbaijan, Turkey and Armenia worked to strengthen their respective national currencies and Georgia should follow suit as well.

FactCheck

took interest in the Minister’s statement and verified its accuracy.

The status of the National Bank of Georgia is determined by the Constitution of Georgia. According to Point 1 of Article 95 of the Constitution: "The National Bank of Georgia conducts the monetary policy of the country in order to ensure the stability of prices and facilitates the stable operation of the financial sector of the country." Hence, the main function of the National Bank of Georgia is to ensure the stability of prices in the country. If the depreciation of GEL causes a considerable danger of inflation, the National Bank of Georgia will be forced to decrease the number of GEL in circulation which will halt the inflation process and positively influence the currency’s exchange rate as well. However, this would negatively influence the country’s economic growth.

The depreciation of GEL with regard to USD started in November 2013. Since then, GEL has depreciated by 28% with regard to USD.

Graph 1:

 Exchange Rate of GEL with Regard to USD and EUR from 2013 to 2015

image001 Source: National Bank of Georgia

The official reserve assets of the National Bank of Georgia decreased by USD 702 million (22.6%) from 2013 to May 2015. The National Bank sold USD 720 million on currency auctions and bought USD 340 million. A total of USD 280 million has been sold since November 2014. In addition, the National Bank of Georgia increased the interest of the monetary policy (refinancing) two times (from 4% to 5% in total) before Kakha Kaladze’s statement and as a result the amount of GEL in the economy decreased by M2 6% (GEL 345 million) from December to May 2015. It should be noted that the sharp depreciation of GEL started from November 2014 and the changes in the amount of GEL in circulation should be studied from that point as well. The amount of GEL in the economy increased by M2 2% (GEL 100 million) in May 2015 as compared to October 2014. The necessity of increasing the amount of GEL in circulation was mainly due to the country’s economic growth rate. Given Georgia’s low but positive economic growth rate, the moderate increase in the supply of GEL is well justified. Should the National Bank sharply limit the supply of GEL, it would lead to a recession in the country.

The interest rate of the monetary policy increased again by 0.5 points on 1 July 2015 and amounted to 5.5%. This decreased the demand on GEL from the banking sector which eventually negatively influences the amount of GEL in circulation.

The national currencies of Azerbaijan and Turkey depreciated as well. TRY 1 was worth USD 0.46 in November 2014 whilst it depreciated by 20% in May 2015 and equalled USD 0.37. According to the Central Bank of Turkey, its foreign currency reserves decreased by 10% (USD 11 billion) from August 2014 to May 2015. The depreciation concerned the AZN as well which, in the same period, depreciated by 20%. Azerbaijan spent 66% (

USD 9.6 billion) of its foreign currency reserves from September 2014 to May 2015. It should be pointed out that Azerbaijan has a pegged exchange rate in which case it is the responsibility of the country’s Central Bank to maintain the stability of the exchange rate using foreign currency reserves.

As for other countries, Armenia’s foreign currency reserves decreased by 34% in 2014 and by 10.2% in 2015. Moldova’s foreign currency reserves decreased by 23.5% in 2014 and by 16.5% in 2015. It should also be noted that Moldova’s economic growth rate should have been 4% in 2015 whilst that of Armenia should have reached 3.5%; however, according to the January 2015 study

of the European Bank for Reconstruction and Development, the economic growth forecasts for Moldova and Armenia went down to 0%. According to the National Bank of Armenia, the economic growth forecast for 2015 varies from 0.4% to 2%. In general, when a country’s central bank spends its foreign currency reserves, the amount of the national currency in circulation decreases and the overall demand drops as well which negatively influences economic growth. In addition, the non-market (relatively low) currency exchange rate, artificially maintained for a short period of time, will hinder the stabilisation of the external trade balance of the country – exports will be decreased and imports will increase. The worsened external trade balance will increase the pressure upon the exchange rate of the national currency and the state will be forced to spend more USD reserves in order to keep the currency from depreciating to the point where it can lead to a financial crisis in the country.

The exchange rate of the national currency of a country is determined by the influx and outflow (international trade, money transfers, tourism, influx of investment and credit capital and factor incomes) of foreign currency. Georgia’s national currency has a floating exchange rate, not a fixed one. In the case of a fixed exchange rate, a national bank works to maintain it at a certain level. The floating exchange rate means that the currency’s exchange rate is determined by market principles (demand and supply).

Conclusion

The exchange rate of GEL with regard to USD was 1.65 in May 2013 whilst in May 2015 is equalled 2.31.

According to the Constitution of Georgia, the main function of the National Bank of Georgia is to maintain monetary stability (control inflation). Hence, the part of Kakha Kaladze’s statement where he says that the National Bank of Georgia must not be "afraid" of spending its reserves, as the central banks of other countries have done, is a wrong approach to the issue.

The National Bank of Georgia sold a total of USD 280 million on currency auction from November 2014 to June 2015. In order to maintain the stability of prices and the national currency, the National Bank of Georgia increased the monetary interest rate. Hence the amount of GEL (monetary aggregate M2) started to decrease from January 2015 and dropped by GEL 345 million by the end of April 2015. However, the amount of GEL in the economy has increased by GEL 100 million as compared to October 2014. The National Bank could have taken more drastic measures and decreased the amount of GEL in the economy even further but this would have been followed by a shrinking of the country’s economy.

The national currencies of Turkey and Azerbaijan depreciated as well. Their national currencies depreciated by 20% with regard to USD from November 2014 to May 2015. The Central Bank of Turkey spent its foreign currency reserves by 10% (USD 11 billion) from August 2014 to May 2015 whilst Azerbaijan sold 66% (USD 9.6 billion) of its foreign currency reserves from September 2014 to May 2015. It should be pointed out that Azerbaijan has a pegged exchange rate in which case it is the responsibility of the country’s Central Bank to maintain the stability of the exchange rate using foreign currency reserves.

The National Bank of Armenia spent 34% of its foreign currency reserves in 2014. Despite this, AMD depreciated by 17% with regard to USD. It should also be noted that the 2015 economic growth forecasts for Moldova and Armenia dropped drastically which was, among other factors, influenced by spending foreign currency reserves in order to maintain the stability of their national currencies’ exchange rates.

FactCheck concludes that Kakha Kaladze’s statement is MOSTLY FALSE.