Issue 1, 2017. February-March



Joseph Larsen

Whatever the reason for the Georgian lari's depreciation in recent times, one thing that isn't up for debate; thousands of individuals and families around the country are in tough financial straits. Since most mortgages in Georgia are held in dollars, middle class families have seen their mortgages dramatically increase in local currency terms. From the USD/GEL rate of 1.75 that existed in September of 2014 to the 2.78 low point reached on 22 December 2016, a fixed mortgage repayment had increased by 59% in local currency terms.

As Central Bank President Koba Gvenetadze said in an interview with the Georgian Public Broadcaster, as of late November, roughly 75,000 people across the country held loans repayable in U.S. dollars—loans that are becoming increasingly difficult to repay.

Responding to this depreciation, the newly-elected Georgian Dream government took decisive action. On November 29, 2016, Prime Minister Giorgi Kvirikashvili unveiled an ambitious plan to reduce the dollarization of the Georgian currency and make the population less dependent on currency fluctuations.

The most prominent part of that plan was an incentive scheme to encourage USD debt holders to convert that debt to GEL:

"According to our plan, loans which had been disbursed to individuals before Jan. 1, 2015, and supported by real estate, would be recalculated in lari at a rate which is lower than the current by 20 points ... For example, if the rate today is 2.5 lari per dollar, the credit will be calculated at a rate of 2.3 lari per dollar."

The difference between the market value of the GEL at time of conversion and the rate that the mortgage holder will receive will be subsidized by the government—which will contribute 65 million lari from the 2017 budget—and the central bank, which is ready to provide banks with roughly 400 million U.S. dollars in liquidity for the conversion of loans. The threshold for each loan stands at 40,000 U.S. dollars, meaning that any debt over that amount can still be converted into lari but will not be subsidized.

Debt holders are eligible for this program if they meet the following conditions: they took out the loan prior to January 1, 2015; the loan to be converted is collateralized by real estate; their total debt doesn't exceed 100,000 U.S. dollars; and they earned less than 100,000 lari in income in 2015. The government estimates that roughly 33,000 loans meet those requirements.

Another component of the larization plan involves measures to support the currency by restricting citizens from taking out foreign currency loans in the future. According to the plan, starting from Jan. 1, 2017, loans worth amounts up to 39,500 U.S. dollars are issuable in lari only. From January 2018, the same policy will apply to loans worth up to 79,000 U.S. dollars.

In sum, the larization plan is aimed at reducing the financial system's dependence on the U.S. dollar, propping up the lari in the short term and preventing currency crises in the future. The plan also includes restrictions on borrowers' taking out loans from online credit platforms, another activity seen as a cause of the country's current financial difficulties.

Not Popular with Everyone

It should be noted that the government's plan isn't welcomed by everyone. Some economists and opposition politicians have criticized the plan.

Much of the criticism comes from the government's use of public funds to subsidize the repayment of loans. That has been a talking point of the opposition United National Movement party. During a parliamentary debate on December 14, 2016, its members referred to this plan as "embezzlement" due to the fact that it allocated taxpayer money to the loan conversion program.

The measure has also been criticized as unfair, with the argument being that it privileges irresponsible individuals—those who knew the risks, but chose to borrow in a foreign currency anyway—at the expense of their more responsible neighbors.

Other misgivings center on the increase in excise taxes on select imported products, which is expected to result in higher prices for certain household goods.

Then, there is the simple argument that the unveiling of the larization plan hasn't immediately restored confidence in the lari. At the time of writing, the official exchange rate stood at 2.66 lari per U.S. dollar, the currency having lost five percent of its value since the plan was announced on Nov. 29, 2016.

Gvenetadze defended the plan in an interview on December 6, 2016, saying that it was a one-off initiative to ease the burden on households in temporary financial crisis, and is not intended to become a long-term policy.

He also reminded critics of the "great grief" felt by families struggling to repay their mortgages.

The plan also has its supporters, and not just among those who might directly benefit.

In a statement issued a few days prior to announcement of the program, the International Monetary Fund lauded government plans to "expand the use of the lari in the economy."

The ratings agency Moody's expects the plan to help restore health to the country's banking sector, stating that "Georgia's plan to convert dollar-denominated mortgage loans into the local currency is credit positive for banks."

All Eyes On 2017

The lari has regained some of its value after falling to its December low. How much of that owes to the larization plan can't be known for certain. However, reducing the financial sector's dependence on the U.S. dollar should have positive long-term effects for Georgia's economy.

Moreover, there are reasons to expect better things in 2017.

The World Bank projects Georgia's GDP to grow by 5.2 percent, exceeding the government's official projection of 4 percent and significantly higher than the 2.4 percent growth that occurred during the first 11 months of 2016.

The government expects stronger growth to ease pressure on the lari. In a January interview with Bloomberg, Finance Minister Dimitri Kumsishvili called a stronger economy "the answer for the lari rate."