Issue 1, 2017. February-March



AmCham Executive Director George Welton analyzes the trends in the devaluation of Georgia's national currency, the lari, compared to neighboring currencies

George Welton

The movements of the Georgian currency are a minor national obsession at the moment, and with good reason. Depreciation has been so dramatic that the same dollar expenditure (or debt repayment) costs 54% more today than it did in 2014.

In addition to increasing the price of imports, this hits a large and significant section of the Georgian economy directly. As much as 10% of Georgian households have significant dollarized debt and, since you need a reasonable income to take on that debt, this is probably concentrated in the small 'middle class'. As this group is Georgia's 'consumer' base, the devaluation of the dollar and the resulting reduction of money in their pockets is likely to hit domestic consumption and, through that, growth.

As many people have mentioned, one of the key drivers of this devaluation has been a decline in exports, which has in turn been driven by weakness in most of the other regional markets. It is, therefore, worth considering for a moment exactly how this has worked. The diagram (figure 1) shows the composition of Georgia's exports by country in 2014.

As a result, the most important national currencies for comparison are those of Azerbaijan, Armenia, Russia and Turkey. Therefore, in the graph (figure 2) we show the decline in their currencies in percentage terms compared to the US dollar. This starts from October 2014, as that is when dramatic depreciation started in Georgia.

As one can see, the lari devalues 54% over this time with brief but significant improvements last summer. The other currencies generally also saw decline, with some similarities and differences in their path over the period. Most significantly, the ruble, the lari and the manat recovered quite a bit in the early summer - as a result of the strengthening oil price and weakening of the dollar internationally.

If one looks at each currency in turn, the differences are pretty big. The manat has done worst with almost 150% depreciation. If the lari had depreciated to the same degree, it would now stand at 4.4 lari to the US dollar!

This is strange, because while Azerbaijan is dependent on oil and gas, so is Russia, and it has not seen its currency decline to the same degree. While the ruble saw an initial and dramatic decline at the end of 2014 and the beginning of 2015, recovering briefly and then declining again, it has seen significant and sustained recovery since the spring of 2016. This is more or less consistent with the time frame of the fall and recovery of the price of oil, with Brent crude hitting a low point of around $30 per barrel in early 2016, but recovering to over $50 per barrel now (again, with quite a bit of variability in the meantime). It is unclear why Azerbaijan has not recovered in a similar way.

After that, the Turkish Lira is now doing worse than the Russian Ruble, seeing its decline accelerate in recent months. This is a result of a fairly recent dramatic slide that started in August, when the extent of the post-coup crack-down in Turkey became apparent.

The Armenian Dram is the outlier. It experienced 20% devaluation in November - October 2014/January 2015 but has not devalued much since then. This is the result of a number of factors. First, the Armenian Central Bank intervened to stop the devaluation in 2015. This would probably have been unsustainable in the long-term, accept that in 2016 a severely weakened consumer market led to a decline in imports and, at the same time, Armenia was also able to increase its exports, with the opening of a new copper mine and increased agricultural exports to Russia.

What do all of these movements tell us about the Georgian Lari? Well, most obviously, they seem to support the idea that devaluation has been led by external forces. Georgia's biggest export markets have seen weakening economies and depreciating currencies that have, until recently, outpaced the problems Georgia has faced. The summer up-tick in currency value mostly matches dollar weakening in the developing world generally (after being historically strong) and the re-weakening that occurred in late summer reflects the dollar strengthening following Brexit, and around the time of Donald Trump's election, as well as the further weakening of Turkish and Azerbaijan currencies.

That said, the most recent depreciation does not seem to reflect any recent significant worsening of the trade situation. While balance of trade is formally $2 billion worse in 2016 than in 2015, that is almost entirely accounted for by $2 billion increase in medicine imports, which is probably the free medicine provided under the hepatitis program. If you take out that difference, then balance of trade is almost exactly the same for 2016 as 2015. FDI figures have not been released for the last quarter yet, but the first three quarters are collectively stronger in 2016 than 2015 and remittances and tourism figures were both up year on year.

This might suggest that the depreciation was driven by other factors, particularly increases in import of products or confusion over what the larization program would entail. Petroleum imports, for example, were 80% higher in December 2016 than December 2015, suggesting an increase driven by a desire to avoid new taxes.

It is also worth noting that these are not simply 'seasonal' fluctuations. It is not the case that the Georgian GEL generally strengthens in the summer because of increased tourism and weakens in the winter. These are myths that are not supported by the data, if one reviews currency fluctuations over the last 10 years or so. It would also make no economic sense to have this kind of seasonality. If markets know which direction the currency is going to move at a particular time of the year, then they will move NOW to take advantage of that information, and this would iron-out the variation.

This also seems to suggest that the general trend of currency movements is largely out of the hands of the Georgian government.

In the short-term, apart from massive currency interventions from the National Bank, there is not much that the Georgian government can do.

In the medium term infrastructure spending from IFIs (as planned) will support the currency. In the long-term promoting exports, FDI and tourism are really the only options.