“Since 5 July 2017, the Ministry of Finance of Georgia has lent GEL 0.5 billion to commercial banks as three-month long deposits. From the period when that money appeared in circulation, GEL started to depreciate.” According to the statement, Mr Gotsiridze believes that this latest depreciation of GEL was caused by the aforementioned decision of the Ministry of Finance.FactCheck
verified the accuracy of the statement.With the aim of the efficient management of state funds and receiving additional revenues, the State Treasury started to deposit free funds in commercial banks beginning in July. The first auction
was held on 4 July 2017 and GEL 50 million was deposited from the state budget to commercial banks for a duration of three months. Since July 2017, the GEL 50 million deposits have been transferred from the State Treasury to commercial banks on a weekly basis. The last auction was held on 5 September 2017 and a total of GEL 500 million was deposited from the State Treasury in commercial banks between July and September.
GEL Exchange Rate and M2 Dynamics in 2017
By depositing the government’s funds in commercial banks, the ability of banks to issue loans increased which was reflected in the money supply. If we take a look at the money supply dynamics, we will see that in the period of June-August the monetary base (without foreign currency) increased by GEL 325 million whilst it increased by GEL 685 million (22%) as compared to August 2016. In regard to broad money (money supply plus deposits in the national currency), the amount of broad money has increased significantly since June with the money supply having increased by GEL 888 million (13.5%) between June and September.
Under the floating currency exchange regime, the GEL exchange rate is determined by the ratio of GEL and USD on the currency market. All other things being equal, the reduction of USD inflows and/or an increase in the amount of GEL in circulation causes the depreciation of the GEL exchange rate.
GEL started to depreciate in the second half of August. In that period, the amount of money deposited by the Government of Georgia in commercial banks was GEL 400 million. Since the start of the GEL depreciation process, the government deposited an additional GEL 100 million in commercial banks. Since 5 September 2017, however, no further auctions vis-à-vis depositing money have been held. From August to September, the GEL to USD exchange rate depreciated by GEL 0.09.
Several factors such as economic growth, the dynamics of the balance of payments and the population’s expectations affect the determination of the currency exchange rate. At this moment, the balance of payments figures have not yet been published and so it is diffcult to assess the extent to which the decreased USD inflow has affected the exchange rate. However, according to the National Bank’s reports, revenues from abroad have a tendency of growth. Specifically, in the period of January-July 2017, tourism incomes increased by 28.5% whilst the volume of remittances grew by 20% (USD 134 million). The information in regard to foreign trade statistics is also promising. At this moment, we are informed that Georgia’s trade balance from January to August improved by USD 28 million as compared to the same period of the previous year.
Even though we do not have the full figures for the balance of payments, we have to take into account the fact that the number of tourists as well as tourism incomes decrease in September and October. If the decrease in tourism incomes is not compensated by another operation from the balance of payments, the amount of USD in the country will reduce and this in turn results in the depreciation of GEL. In light of decreasing incomes in USD, increasing the amount of GEL in the economy provides additional pressure on the national currency exchange rate.
The reason for the depreciation of GEL in September, together with increased M2, could have been the decreased USD inflow to the country. However, in order to assess the full picture, it is necessary to have the loan capital dynamics as well as the current balance of payments figures which will not be published until the end of this year.
Conclusion Depositing the Government of Georgia’s funds in commercial banks has increased the banks’ loan resources as reflected in the money supply in the economy. In fact, in June-August, money supply increased significantly which would cause a depreciation of GEL under reduced USD inflows. The full information about USD inflows is given in the balance of payments. As the balance of payments figures are not yet available, it is difficult to assess what has affected the GEL exchange rate. Therefore, at this moment, FactCheck leaves Roman Gotsiridze’s statement WITHOUT VERDICT.