On 13 November 2016, the Prime Minister of Georgia, Giorgi Kvirikashvili, stated that the GEL depreciation was caused by increased import, which itself is a positive process, because it indicates increased consumption. Additionally, as stated by the Prime Minister: “The quantity of export has increased; however, because prices have plunged on the main export markets, exports cannot catch up with imports in terms of monetary value.”

verified the accuracy of the Prime Minister’s statement.

The GEL exchange rate is determined by trade on the currency market. If the USD supply to the country exceeds demand, the GEL exchange rate appreciates. If demand on USD is higher than supply, the GEL exchange rate depreciates. The USD supply is determined by the inflow of USD into the country and the need for the American currency. On the other hand, the demand on USD rises when the amount of GEL in circulation increases, all other things being equal.

A country’s current account balance registers the amount of USD which comes into the country and leaves the country. The current account balance includes the imports and exports of goods, imports and exports of services, revenues (for instance, money remittances from those employed abroad), transfers (for instance, grants), investments, loans and changes in reserves. Therefore, to make conclusions upon the basis of only one component of the account balance; that is, imports, is inappropriate even though the increase in imports causes an outflow of foreign currency from the country and negatively affects the GEL exchange rate.

In October 2016, as compared to October 2015, the volume of imported goods to Georgia increased by USD 45.6 million (7.4%) which does not constitute a significant growth. If we take a look at January-October 2016 imports, we will see that without medication for hepatitis C (we do not pay for importing this medicine), they have decreased by USD 120 million (2%) as compared to the same period of the previous year. Additionally, in order to stop the GEL depreciation, the National Bank of Georgia sold USD 100 million in October which is 2.2 times more as compared to the increased import.

A new wave of GEL depreciation started at the end of August – not in October – and continued in September. In order to stop the GEL depreciation, the National Bank of Georgia sold USD 80 million in the period of August 25 to September 27. Of note is that Georgia’s exports increased by USD 15.4 million and imports increased by approximately USD 10 million in the month of September.

In January-October 2016, Georgia’s foreign trade deficit decreased by almost USD 100 million (2%).

The Prime Minister’s statement in regard to the simultaneous growth in the quantity of exports and dropping prices (denominated in USD) on export production is true.

We still do not know whether or not the current account deficit has improved in the past months because the complete data for the third quarter will be published at the end of December whilst the complete data for the fourth quarter (October-December) will be published in March 2017. 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 into the country as a result of these aforementioned transactions. This means that USD 1.7 billion more left Georgia in 2015 as compared to the amount of money which came into the country.

The current account also includes tourism figures which are growing significantly as compared to the previous year. However, because tourism is seasonal, the amount of tourists to Georgia in October was 320,000 less as compared to August. This means that tourism incomes in October were USD 100 million less as compared to tourism incomes in August.

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 insufficient 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.

In regard to economic growth, which is one of the factors affecting the GEL exchange rate, we can see that 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 that the country’s economic growth is worsening.

One of the monetary macroeconomic indicators also affecting the GEL exchange rate is the total sum of GEL in circulation (M2 aggregate) which has increased by GEL 810 million (15%) 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.

In regard to 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 185 million having been spent from the balance as of 21 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. Foreign funding, intended for budget support, was also not transferred in October.

The growth of imports by 7.45% (USD 45.6 million) in October does not constitute a significant growth of imports (taking into account the fact that imports of the last ten months have decreased) and is not the only reason behind the GEL depreciation. It is true that the growth of imports indicates a growth in the country’s consumption but based upon the data for just one month, it is difficult to say whether or not there is a trend of growth in consumption. This remains to be seen in the upcoming months.

The quantity of export has indeed increased but it cannot catch up with import figures. As a result, Georgia’s trade deficit was USD 4.2 billion in the period of January to October. Georgia’s trade deficit has always been high but it was balanced by other sources of foreign currency inflows. The situation in this regard from July to November is unknown and statistics will be published at the end of March 2017. The statistics vis-à-vis foreign investments and credits will be of particular importance.

The factors which negatively affect the GEL exchange rate are already known (whilst the Prime Minister does not mention them) and are as follows:  decreased economic growth rate, decreased tourism on a seasonal basis, increased amount of GEL in circulation and an only 2% absorption rate of the budget supporting foreign funding by the Government of Georgia.