By Ariela Shapiro (04/15/2015 issue of the CACI Analyst)

Since November 2014, Georgia’s national currency, the lari (GEL), has devalued an estimated 28 percent against the dollar, measuring at 2.23 to 1 dollar as of April 10, 2015. This currency crisis has severely impacted local Georgian consumers and the operating capacity of Georgian businesses while undermining foreign investor confidence. The current crisis was externally catalyzed by falling oil prices, the Russian ruble’s harsh inflation and regional political and economic destabilization due to the Ukrainian conflict. Domestically, the economic crisis has been exacerbated by the Georgian government’s ambiguous, often ad hoc, economic strategy. Amidst the failing economy and falling domestic confidence, the Georgian political landscape remains deeply fractured and no party has demonstrated political willingness to create a multi-partisan solution to the economic crisis.

Picture 3 CACI 15 04.jpg

Published in Analytical Articles
Wednesday, 18 March 2015 12:18

Georgia Faces Economic Crisis

By Eka Janashia (03/18/2015 issue of the CACI Analyst)

Georgia’s national currency, GEL (Lari) has lost 29 percent of its value against the US$ since November last year and, after a brief recovery, has continued depreciation until present. On February 24, the GEL saw its largest drop reflected in a single-day 3 percent fall. The Government pledged to present a “currency stabilization plan” for March 5 but failed to match the vow.

The implications of Georgia’s currency devaluation have become a major provenance for political speculation, public discontent, and concerns among domestic and foreign businesses.

Until the end of February, the government’s economic team kept calm regarding the depreciation of the GEL, largely echoing former Prime Minister Bidzina Ivanishvili’s assertion that he was completely satisfied with the work of the government and the National Bank of Georgia (NBG), instead linking the currency devaluation to external factors. “Nothing special is happening, the Lari is doing very well,” he claimed in January.

However, in response to public concerns after the GEL lost 3 percent of its value in a single day on February 24, Ivanishvili blamed the head of NBG Giorgi Kadagidze for idleness. “Kadagidze, who was appointed by the United National Movement [in 2009], led us to the crisis of the national currency with his inaction and wrong decisions” since under the constitution, the president of NBG is responsible for preventing undesirable developments, Ivanishvili said. After this statement, some ministers and the GD ruling coalition representatives also began disparaging the NBG’s work.

Kadagidze refused to engage in political debates but in response termed the GD attacks a “deliberate slanderous campaign against NBG” and reminded the public about the chronology of the events.

In 2013, Kadagidze warned the government that the projected 6 percent growth was overoptimistic and suggested a downward revision. Indeed, economic growth that year amounted to only 3.1 percent, half of what the government intended to achieve.

Kadagidze insisted that he also advised the government to avoid uneven spending from the state budget as it would increase pressure on the currency’s exchange rate, which in late 2013 resulted in an NBG intervention by selling several hundred million US$ at the exchange market, resulting in a decline of the country’s foreign reserves from US$ 3.1 billion in October, 2013, to US$ 2.82 billion by the end of 2013.

At that time, the intervention was justified as a one-time measure, whereas the current GEL depreciation is caused by the economy’s overall failure as foreign currency inflows have plunged since 2013, Kadagidze claimed.

Georgian exports fell by 30 percent and remittances by 23 percent year on year in January. In addition, the number of tourists shrunk by 7.8 percent in January-February compared to the same period last year. In effect, the account deficit reached 9.5 percent of GDP in 2014. Kadagidze argues that filling the deficit with foreign currency reserves is “counterproductive and fruitless.”

In cooperation with the Government and the NBG, the Analytic Mission of the International Monetary Fund (IMF) studied Georgia’s macroeconomic indicators in light of the recent economic hardship. A concluding statement lists a set of external factors such as the ongoing crisis in Ukraine; the growing recession in Russia; and currency devaluations in trading partner countries as reasons for Georgia’s slowing economy. Economic growth for this year could reach only 2 percent, instead of the previously estimated 5 percent, and even this projection is under the risk, the mission said.

As a countermeasure, the IMF suggested restrictions in administrative spending and increases of specific taxes in order to eschew a further upsurge of the budget deficit. At the same time, the IMF fully supported NBG’s policy of limited intervention in the foreign exchange market, arguing that its primary task is to maintain price stability in the country and while fulfilling this mission the independence of NBG “should be preserved and respected.”

In the wake of this statement, the Georgian government vowed to reduce administrative costs and pursue a so called “tighten belts” policy. Moreover, it declared its intention to ramp up the privatization process with an aim to raise US$ 300-350 million within the next two-three months.

To this end, the government plans to sell state assets – the historical buildings of the Economy Ministry and NBG in downtown Tbilisi, government residences in Adjara and near the capital city, and shares in thermal power plants and the National Lottery Company.

Nevertheless, some economic experts and opposition political parties argue that one-time investments cannot recover the ailing economy. The former president of NBG, Roman Gotsiridze, argues that enlarged social expenses, agricultural loans, and healthcare projects make the state budget inflexible. The budget expenditure should be reduced by at least GEL 300 million, otherwise the national currency will continue to depreciate and prices will rise, which will completely destroy the country’s economy.

The United National Movement (UNM) and Free Democrats, two parliamentary opposition parties, blamed the government for lacking a clear vision how to get the country out of the crisis. UNM plans to organize a protest rally in Tbilisi on March 21 to demand the government’s resignation.

It is obvious that, after GD came into power, the country’s economic policy has been less resilient to external shocks and the government has been unable to elaborate timely and cogent policies to mitigate the adversary external impact on the economy. The government’s poor economic performance encourages protest actions from opposition parties though the anticipated political turbulence could well be exploited also by radical pro-Russian parties. 

Published in Field Reports
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