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False expectations affect lari

By Tea Mariamidze
Monday, December 5
Koba Gvenetadze, the President of the National Bank of Georgia (NBG), noted that the recent stir in the foreign exchange market - when the national currency Lari (GEL) reached the historic rate of its depreciation against the US dollar and gained value the same day - was to some extent caused by false expectations.

Gvenetadze explained that the national currency depreciated not only in Georgia but in neighboring states too.

“The dollar rate increased and caused the devaluation of national currencies in the neighboring countries,” said Gvenetadze, and added that the market is characterized by so-called ‘overshooting’, which means reaching a high rate and returning to the old rate after a short period.

The NBG Head underlined that Georgia had a floating exchange rate and it was difficult for the NBG to make any future predictions about it.

Moreover, Gvenetadze did not specify if the recent situation was caused by the so-called larization plan, proposed by the Georgian government with the purpose of stabilizing the GEL.

The lari's depreciation hit its peak on December 1, when 1 USD reached 2.59 GEL from 2.53 GEL. The NBG then issued a statement, and said evaluation of the US dollar on the world exchange market was the main driver of the weakening lari. The Bank also noted that one of the main factors of negative pressure on the exchange rate was false expectations about the Lari's further devaluation, and also because people were converting their Lari into USD and were saving their money in US dollar.

Soon after the statement of the NBG, the Lari rate stabilized, and 1 USD became 2.56 GEL.

Georgia’s Finance Minister, Dimitri Kumsishvili also made comment over the issue. He said that “some wrong decisions” made by private sector players caused the devaluation of lari.

He said that the situation on the monetary market was regulated thanks to the right coordination with Koba Gvenetadze.

“We had a ‘supply shock’ but the situation was regulated through a tight coordination of the finance ministry and the NBG,” said Kumsishvili.

The main opposition party, the United National Movement (UNM), says the fluctuation of the national currency was caused by the government’s package of changes, which envisages increased tax on tobacco, oil products, imported cars and gambling business. Moreover, the government plans to ban online loans and convert loans in USD into lari.

“The government’s package of changes, including the larization plan, which was announced proudly, caused negative expectations on the market,” Sergo Kapanadze, a member of the UNM, stated.

Some economic analysts believe that the GEL's fluctuation is directly linked to the government’s plans, while others think the situation was worsened due to negative expectations and mass panic. However, nearly all analysts agree that the whole economic policy of the country should be changed.

Economic analyst, Paata Sheshelidze recommends the government to reduce administrative costs and declare moratorium on taking external and internal Debts. He also believes that administrative expenses should be reduced.

Financial expert Nodar Ebanoidze says the recent developments were led due to financial panic. Moreover, he thinks that a negative trade index and lack of investment are also important factors.

The GEL began to lose its value in November 2014. At that time, one US dollar was equivalent to 1.75 Laris. Since then, the National Bank has intervened many times, but without any success.