The President of the National Bank of Georgia, Giorgi Kadagidze, in his speech before the Parliament of Georgia, stated that despite the growth of the amount of refinanced loans, loans issued by commercial banks have not increased and the growth of the amount of refinanced loans does not equal the growth of the total sum of money.

took interest in the accuracy of the statement.

After the start of the depreciation of GEL (November 2014) the National Bank of Georgia was frequently accused of having contributed to the national currency’s depreciation because of the growth in the amount of refinanced loans. A refinanced loan is a monetary instrument which has been used by the National Bank since September 2008. It is a loan of a one-week duration period which is issued by the National Bank to other commercial banks in order to guarantee their liquidity (in order to make sure that a bank does not have a problem to fund its short-term obligations in a short period of time).

In November 2014, the amount of refinanced loans was GEL 350 million whilst at the end of December it reached GEL 550 million. In February 2015, refinanced loans amounted to GEL 700 million and in March this amount stood at GEL 900 million. A record amount was registered on 18 June 2015 when refinanced loans reached GEL 1,017 million. At the end of June, this number dropped to GEL 900 million. The decrease in GEL denominated deposits in commercial banks was the reason for the significant growth in the amount of refinanced loans since January 2015. In January, the amount of deposits shrank by GEL 360 million.

 Refinanced and Standing Refinanced Loans and Domestic Debt of the Government of Georgia (GEL million)

The volume of refinanced loans largely depends upon the refinanced loan rate (monetary policy rate). Since the beginning of 2015, including the month of May, the refinancing interest rate rose three times by 0.5% (from 4% to 5.5%). Nevertheless, the increased demand of commercial banks on refinanced loans might be caused by the rising demand on GEL denominated loans and the decline in USD denominated loans.

The National Bank could have made a more radical step and increased the rate of refinanced loans even more. However, that step would have negatively affected the economic growth of the country and created the risks of a recession.

During the first five months of 2015, the amount of GEL denominated loans issued by commercial banks increased by 3.7%. On 1 January 2015 the number was GEL 5.1 billion whilst on 1 June 2015 it reached GEL 5.3 billion. However, since December 2014 until June 2015, this number has increased by 9.6% (GEL 464 million). In total, the volume of loans issued by commercial banks increased at a slower pace as compared to the volume of refinanced loans. It must be noted that GEL denominated loans increased because of the decision of consumers to convert their loans from USD to GEL. At the beginning of 2015 the amount of USD denominated loans was USD 4.19 billion whilst at the end of May it decreased by 2.9% and equalled USD 4.07 billion.

It is important to consider that the Government of Georgia borrows money from commercial banks for the domestic debt. Since November 2014 and including May 2015, Georgia’s domestic debt increased by GEL 327 million. Therefore, 58% of the growth of GEL denominated loans was taken by the Government of Georgia as domestic debt. The additional GEL 327 million entered the market owing to the increased domestic debt of the Government of Georgia (see Graph 1).

In the end, it is the total sum of GEL in circulation which affects the GEL exchange rate and not any single component. In December 2014, the money aggregate (M2) rose by 5.2% as compared to November 2014 and reached GEL 5.91 billion. By May 2015, this number dropped by 4.3% and totalled GEL 5.66 billion. Other things being equal, when the total sum of the money in the market decreases, a national currency appreciates against other foreign currencies.

Since November 2014 until June of this year, the amount of refinanced loans rose from GEL 350 million to GEL 900 million. The growth of refinanced loans was largely caused by the reduction of GEL denominated deposits, the growth of the Government’s domestic debt and the conversion of loans issued in foreign currencies into GEL. It must be noted that the refinanced loan rate from 1 January 2015 until 31 May 2015 increased from 4% to 5.5%. Other things being equal, the increase in the refinancing rate causes the reduction of the supply of money to the market.

Since November 2014 until June 2015, the amount of GEL denominated loans issued by commercial banks has increased by GEL 562 million (12%). Of that amount, GEL 327 million was borrowed for the domestic debt of the Government of Georgia. The amount of USD denominated loans issued by commercial banks dropped by USD 120 million (2.9%).

Since November 2014, the GEL supply (M2) increased by 5.2%. However, by May 2015, it decreased by 4.3%.  The decrease in the money supply to the market deters the depreciation of the GEL exchange rate.