On 3 November 2016, answering a question on the GEL exchange rate, the Minister of Finance, Nodar Khaduri, stated: “Macroeconomic parameters have not changed and, on the contrary, they have improved. Among others, remittances, which had previously decreased, have now increased whilst imports are decreasing, which is also important. Additionally, there will be a positive effect on the Government of Georgia’s USD bank accounts because at the end of November or in December, the Asian Development Bank will transfer money. I think this is truly temporary and the GEL exchange rate will inevitably strengthen in the nearest future.”

verified the accuracy of the Minister’s statement.

GEL started to depreciate at the end of 2013 when the USD to GEL exchange rate stood at 1.66. After the next wave of depreciation, the GEL exchange rate stopped at 1.75. A more powerful wave of depreciation started in November 2015 with the exchange rate having hit a record number of 2.5 in February 2016. In spring, the USD to GEL exchange rate appreciated to 2.13 but then the trend of depreciation re-emerged. Since the end of August 2016, the pace of the depreciation of GEL started to accelerate after which the National Bank of Georgia sold USD 180 million in order to stop the depreciation of the national currency. However, since the end of August to the present day, the GEL exchange rate has dropped by 7%.

The GEL exchange rate is determined by trade on the currency market. If the supply of USD in the country exceeds the demand on USD, the GEL exchange rate increases. If the demand on USD is higher than supply, then the GEL exchange rate drops. The supply of USD is determined by the volume of USD coming into the country and the amount of USD which is needed. On the other hand, the demand on USD increases when the amount of GEL in circulation in the country rises when all other things remain equal.

The Minister of Finance talks about improved macroeconomic parameters although he only highlights an increase in the volume of remittances and a decrease in imports. Macroeconomic parameters include much more indicators such as, for example: economic growth, inflation, the current account balance, investments, fiscal and monetary figures and unemployment. Of these, the GEL nominal exchange rate is not directly affected by inflation and unemployment. Other parameters affect the GEL exchange rate to some certain extents.

Among the macroeconomic parameters, remittances (money transfers) are not to be taken separately but are one of the integral parts of the current account deficit together with the import and export of goods and services, transfers and other incomes. Therefore, a decrease in imports and a growth in remittances are futile alone if the current account balance has not improved. If we do not include the cost of medicine for the hepatitis C programme, this year’s import has indeed decreased (by 2%) whilst the amount of remittances in July-September increased by 14%. We do not know yet whether or not the current account balance has improved or worsened in the last months because the full data for the third quarter will be published in December whilst the data for the fourth quarter (October-December) will be published at the end of March 2017. Therefore, neither the Minister of Finance nor other members of the Government of Georgia have any exact information vis-à-vis any improvements in the current account balance. At the same time, the most significant reason for the GEL depreciation is the current account deficit which was USD 1.7 billion in 2015 and USD 915 million in the first two quarters of 2016 (this indicator worsened by USD 72 million as compared to the same period of the previous year). The current account deficit illustrates the amount of foreign currency that leaves Georgia as a result of trade in goods and services as well as income and money transfers as compared to the amount of foreign currency which comes to the country as a result of these aforementioned transactions. This means that USD 1.7 milliard more left Georgia in 2015 as compared to the amount of money which came into the country.

In order to prevent the GEL depreciation, the current account deficit must be covered by capital and financial accounts which include investments and loans. If this is not sufficient to cover the deficit, then the country’s currency reserves are drained and, at the same time, GEL depreciates. The reason for the GEL appreciation in the second quarter of 2016 was that USD 408 million more came into the country as compared to the amount of foreign currency that left. More USD were injected because the loan capital increased. Information about investments and credits for the third and fourth quarters is still unknown with the third quarter’s data to be published at the end of the year. Therefore, no one knows the full picture as to what has been happening in regard to GEL over the last months.

If we look at economic growth, January-September’s economic growth constitutes 2.6%, the third quarter’s economic growth is 2.2% and the month of September’s economic growth is 1.5%. This means thatthe country’s economic growth is worsening which is one of the macroeconomic factors affecting the GEL exchange rate.

In regard to monetary macroeconomic indicators, GEL is affected by the total sum of GEL in circulation (M2 aggregate) which has increased by GEL 840 million (16%) since April. The growth in the total sum of GEL in circulation negatively affects the GEL exchange rate but considering the other goals of monetary policy (level of inflation, economic growth), its growth is both logical and necessary.

If we look at fiscal indicators, the GEL exchange rate is affected by the size of the budget deficit, especially if the budget deficit is covered by domestic borrowing and money on the balance. In January-October, Georgia’s domestic debt increased by GEL 270 million (whilst the annual plan is GEL 200 million) with GEL 111 million having been spent from the balance as of 8 November 2016. In regard to covering the budget deficit through using external sources (which brings foreign currency into the country), the Ministry of Finance is significantly lagging behind. In January-September, the plan for absorbing budget supporting grants and loans was fulfilled by only 2% and the deficit was USD 160 million. The failure to absorb this money is the reason for the Ministry of Finance’s decision to take more domestic debt than was initially planned.

Nodar Khaduri says that part of Georgia’s foreign funding will be transferred in November-December but we have been unable to verify this process at this moment. However, the transfer of unabsorbed money before the end of the year will definitely help the GEL exchange rate.

In regard to an inevitable appreciation of GEL, the Minister of Finance’s statement is mostly aimed at generating positive expectations among the population rather than being based on any real data. It is acknowledged, however, that expectations on the part of the population do indeed have a significant impact upon the determination of the GEL exchange rate in the short-term perspective.

Based on almost non-existent data, Nodar Khaduri says that the macroeconomic parameters affecting the GEL exchange rate have improved. Growth of income from tourism, decreased imports and a rising volume of remittances in the last months are not sufficient to usher in a GEL appreciation. Equally important is to know what the trends in investment and loan capital are because only January-June data are presently known.