Roman Gotsiridze: “Reserves are at a critical juncture. The NBG sold USD 700 million before the elections, yet it did not intervene when the GEL depreciated by ten points today.”
Verdict: FactCheck leaves Roman Gotsiridze’s statement WITHOUT A VERDICT.
The National Bank of Georgia’s (NBG) reserves totalled USD 4.08 billion as of 31 October 2024, marking their lowest level recorded since July 2022.Whilst reserves have been on a downward trend for over a year, the decline accelerated in October when the NBG sold USD 591 million. The total sale reached USD 697 million when combined with September.In addition to declines in absolute terms, the reserves also fall short of the International Monetary Fund’s (IMF) adequacy coefficient. This coefficient had already dropped to 90% even in 2023, representing the lowest point under the Georgian Dream’s governance.Following Irakli Kobakhidze’s announcement regarding the suspension of Georgia’s European integration, the GEL depreciated against the USD by GEL 0.13, from 2.74 to 2.87, in three business days.Previously, a GEL 0.05-0.06 depreciation was sufficient to prompt the NBG to intervene, for instance, in May-June of the current year and September of last year. In contrast to its earlier policies, the aforementioned regulatory institution now refrains from engaging in foreign exchange auction in the current scenario to halt depreciation.The NBG conducts USD trading through currency auctions and the Bmatch platform. Information about currency auctions is released on the same day whereas trading on the Bmatch platform is only published on the 25th of the following month. November’s trade results will be published on 25 December whilst December’s results will become available on 25 January 2025.The exact reasons for the NBG’s decision not to conduct foreign exchange auctions remain unclear. Possible explanations are ongoing trade through the Bmatch platform, efforts to maintain already depleted reserves or anticipation of worsening macroeconomic conditions, when selling reserves would be ineffective in halting currency depreciation. However, further analysis is challenging without access to Bmatch trade data.Whilst the former MP accurately cited the substantial depletion of reserves and the NBG’s lack of foreign exchange auctions under similar conditions, the results of Bmatch platform trade are unknown. Hence, FactCheck has decided to leave Roman Gotsiridze’s statement WITHOUT A VERDICT.
Analysis
Whilst commenting on the NBG’s reserves and the GEL exchange rates, a member of the tenth convocation Parliament, Roman Gotsiridze, stated: “We are at a critical point today, with reserves depleted and the majority refraining from intervening in the foreign exchange market. This comes after USD 700 million was sold to keep the exchange rate stable during the election period.”
“…The NBG is refraining from action. Practically, we are witnessing a 10-point decline in GEL, yet the NBG remains inactive. It seems, they have no regard for the domestic currency or prices in our country.”
The National Bank of Georgia’s (NBG) reserves totalled USD 4.08 billion as of 31 October 2024, marking their lowest level recorded since July 2022. The reserves decreased by USD 628 million in October 2024 alone and by USD 1 billion in total over the past year.
Graph 1:Official International Reserves (USD Million)
Source: National Bank of Georgia
The NBG maintains international reserves denominated in foreign currency to prevent the impact of external shocks, ensure liquidity and facilitate foreign currency payments for the Government of Georgia during financial crises. Reserve management is one of the functions of the NBG (Organic Law on the National Bank of Georgia, Article 3).
Reserves can be replenished or depleted in several ways. Direct purchases or borrowing increase the volume of reserves whilst debt payments and foreign exchange interventions result in a decrease in reserves.
The NBG engages in USD trading through the foreign exchange auction and the Bmatch platform. Information about currency auctions is released on the same day whereas trading on the Bmatch platform is only published on the 25th of the following month.
Whilst no currency auctions were held in September, USD 106 million was sold via the Bmatch platform. The NBG sold USD 213 million in reserves through foreign exchange auctions and USD 378 million on Bmatch in October. Combined, the NBG intervened with USD 697 million through both of the aforementioned channels in the two-month period leading up to the elections.
In general, whilst selling reserves is an accepted practice to mitigate shocks and adverse expectations, the scale of these interventions raises the question regarding the necessity of reducing reserves by USD 700 million in just two months through net sales. Although the NBG has previously conducted foreign exchange interventions, the magnitude was substantially lower as, for instance, the regulatory institution sold USD 199 million in May-June 2024 – 3.5 times smaller than the current intervention.
Reserves are measured both quantitatively in USD and by calculating the adequacy ratio. Notably, the adequacy ratio is more significant given the of the economy as, for instance, reserves of USD 10 billion would be a strong indicator for Georgia but catastrophic for Germany.
The IMF utilises a specific methodology to assess the state of reserves. The adequacy of reserves is assessed using the International Monetary Fund's methodology calculated by the formula: ARA Metric = 5% * exports + 5% * broad money + 30% * short-term debt + 15% * other liabilities. It is preferable for the adequacy ratio to be within 100%-150%.
The NBG has consistently fallen short of the adequacy coefficient since 2015 with the exception of 2020-2021 when reserves increased due to a high foreign debt. The adequacy ratio decreased to 96% in 2022 and 90% in 2023, marking the lowest under the Georgian Dream’s governance. The reserves fell by USD 1 billion in 2024 whilst the economy and foreign trade expanded. The aforementioned trend suggests that the adequacy coefficient in 2024 has likely deteriorated even further.
Graph 2: Adequacy Ratio of Reserves
Source: International Monetary Fund
Another measure of reserve adequacy is the import coverage ratio. The volume of reserves should exceed the projected import figure for the next three months. Georgia fulfilled the necessary ratio for the first time in 2009 and the volume of reserves consistently exceeded the imports of the next three months until 2023, except for 2014. This ratio decreased to 2.76 in 2023.
Graph 3: Adequacy Ratio of Reserves According to the Import Coverage Ratio
Source: International Monetary Fund
The rating agency Fitch stated that Georgia’s foreign exchange reserves are below the level of other countries with a BB rating in its discussion. The NBG’s reserves cover 2.6 months of its external payments whilst the average for other countries with BB rating constitutes 4.7 months, as of 2024, according to Fitch.
The last foreign exchange auction was conducted on 25 October – a day before the elections. GEL remained stable for an entire month, depreciating by merely GEL 0.02 against the USD due to the global strengthening of the USD. Furthermore, GEL appreciated by GEL 0.05 against the EUR and GEL 0.06 against the GBP. Everything changed drastically after the Prime Minister’s briefing on the evening of 28 November. Irakli Kobakhidze announced a suspension of European Integration and the rejection of EU grants until the end of 2028.
The official exchange rate for 29 November had already been set at GEL 2.74 before the Prime Minister’s briefing. The official exchange rate for 2 December (as no rates are set on weekends) rose to 2.78, later reaching GEL 2.85 by 3 December and GEL 2.87 by 4 December.
Graph 4: Official Exchange Rate of GEL against USD
Source: National Bank of Georgia
USD became GEL 0.13 more expensive in just three business days, reflecting a 4.8% depreciation of GEL. A 4.8% decline in just three days is significant and the NBG typically intervenes in such cases. Similar interventions occurred in September of the previous year during the Partskhaladze case and in May of this year when sanctions were announced.
The US sanctioned former Prosecutor General Otar Partskhaladze in September 2023. In response, the acting president of the NBG amended an order she had signed on 4 August which required commercial banks to enforce sanctions on Georgian citizens only after a verdict of guilty by the Court of Georgia. The exchange rate depreciated by GEL 0.06, from GEL 2.63 to GEL 2.69, over the course of four days. The NBG sold a total of USD 57 million at currency auctions on 20 and 21 September, followed by an additional USD 8 million on 25 September.
The GEL depreciated by GEL 0.08 in three days, from GEL 2.68 to GEL 2.76, in May of this year, following the adoption of the Russian-style law on its third hearing and the subsequent announcement of potential sanctions. In response, the NBG sold USD 60 million through foreign exchange auctions in a single day. GEL depreciated by an additional GEL 0.05, reaching GEL 2.77 from GEL 2.72, by the end of the month, as the government overcame the veto. Subsequently, the NBG intervened with a USD 48 million sale. The NBG made another intervention, selling USD 60 million, when the exchange rate surpassed GEL 2.85 in June.
Graph 5: Reserves Sold at Foreign Exchange Auction During Rapid Depreciation of GEL (USD Million)
Source: National Bank of Georgia
A GEL 0.05-0.06 depreciation was sufficient to prompt the NBG to intervene previously – for instance, in the current year, the previous year or the periods before. However, the recent GEL 0.13 depreciation has been met with no efforts from the NBG. Whilst trading may still occur on the Bmatch platform, its results are usually disclosed on the 25th of the following month. The NBG pre-announced that it had purchased USD 86 million on the Bmatch platform on 25 November just three days before Irakli Kobakhidze’s briefing. If no further announcements are made by the regulatory institution, the results for the trade conducted on 26-30 November will be published on 25 December whilst the December data will be available on 25 January 2024.
The NBG’s decision not to conduct foreign exchange auctions could be explained by three logical reasons:
trading at GEL 2.83. It is unclear whether this slight strengthening was a result of the initial shock effect or an intervention by the NBG.
Another fact highlights the critical shortage of reserves. The NBG lowered the reserve requirement on foreign currency deposits from 25% to 20% in November 2023; however, it increased the requirement by five percentage points by December 2024. This adjustment was attributed to the potential increase in reserves by USD 300-340 million, alongside efforts towards de-dollarisation.
Whilst the former MP accurately cited the substantial depletion of reserves and the NBG’s lack of foreign exchange auctions under similar conditions, the results of Bmatch platform trade are unknown. Hence, FactCheck has decided to leave Roman Gotsiridze’s statement WITHOUT A VERDICT.
